Why is productivity so weak?
One of the major reasons I expects sluggish growth and weak earnings is the secular decline in the growth of real net fixed nonresidential investment. The dominant factor driving productivity growth is workers being provided additional capital equipment to assist them. For instance, employees of a B2B company may improve their productivity if payment solutions from companies like Paystand are utilized. It is the old simple story of getting a ditch dug. Would you rather have a dozen men with shovels or one guy with a back-hoe to do the job?
It is important to look at net, not gross investment, because more and more business capital spending is on high technology equipment. But high tech has a much shorter life span than traditional capital goods. Consequently, more and more of gross investment is just to replace obsolete equipment. We are having to run faster and faster just to stay even. The growth of net nonresidential capital equipment averaged 3.3% from 1950 to 1980 and 2.5% from 1980 to 2008. Over the past five years its’ average growth was 1.1%, or 0.0% growth on a per employee basis. No wonder productivity growth is so weak and is most likely to remain so..
“Would you rather have a dozen men with shovels or one guy with a back-hoe to do the job?”
That depends. Let’s say that twelve men with shovels can do the job in the same amount of time as the one man with a backhoe.
If everyone is using his own equipment, and the price is the same, I don’t care. If, however, I am the owner of the equipment, and I have a backhoe driver who thinks he should earn twelve times as much per hour as the guys with shovels because “his” productivity is twelve times that of the other guys, I’m going to fire his sorry @$$ and train someone with a shovel to work the backhoe.
You are really so convinced of your ideology that you are not ashamed to make such terrible statements in public?
You have to be a republican.
If you are the owner of the back-hoe you will charge a price just below what it cost to hire 12 guys with shovels while paying the driver much less — from twice to six times what you pay each guy with a shovel —
and make massive profits.
You really do not understand how capitalism works, do you?
No expert here but could the shortness of the life of high tech capital that I hear about (like here) be because ever more productive capital is ready to take its place on the cheap (Moore’s Law)? Sort of like newer, more powerful locomotives coming off the drawing boards for less? Would that be so bad?
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Another scary angle on de-unionized America:
Tom Geoghegan — in his recent book “Only One Thing Can Save Us” around page 28 — portrays US auto manufacturers dumbing assembly jobs down (it’s called “simplicity”) — I’m just starting to write about this for the first time — gutting productivity nationwide in the usual short-sighted quest to squeeze labor.
In Germany (labor having a big say because of the co-determination worker councils) employees are brought into the design and manufacturing process to the nth degree. Which makes them productive enough to average $66 an hour including benefits.
In the US manufacturing jobs are now being reduced to simpler and simpler component portions — why auto workers can be reduced from $28 an hour to $14.
Thing is we only have X amount of workers — a fixed number. If we are now on a nationwide race to shrink the productivity of individual workers — that may look good for an individual company — fallacy of composition — but we are on a head long charge to lower and lower our overall output per worker.
Meantime all other economies in the world — especially in the third world — are desperately attempting to pick up (and/or steal) product manufacturing skills so they can achieve maximum possible prosperity some day. We can wave to them going up while we are going down.
Drew, good points.
This is the price we pay for cheap labor. If labor is the cheap factor of production it does not pay to try to replace labor with new capital equipment. Consequently, the capital stocks does not growth and standards of living stagnate or decline.
Spencer: “If you are the owner of the back-hoe you will charge a price just below what it cost to hire 12 guys with shovels while paying the driver much less — from twice to six times what you pay each guy with a shovel – and make massive profits.”
Neither I, nor the original poster, mentioned anything about hiring out one’s services. We were discussing which we would prefer to dig the trench. Please try to pay attention.
Denis: “Thing is we only have X amount of workers — a fixed number. If we are now on a nationwide race to shrink the productivity of individual workers — that may look good for an individual company — fallacy of composition — but we are on a head long charge to lower and lower our overall output per worker.”
I really don’t see that. Our industrial production is now higher than ever, but out manufacturing employment is down. Thus, we are increasing the productivity of our manufacturing workers.
Going back to the backhoe example, the cost of the backhoe has to be factored in. If it is cheaper to hire twelve guys and buy them each a shovel, and more expensive to hire a backhoe operator and buy him a backhoe, I’ll stick with the twelve guys with shovels.
If the government comes along and forces me to pay those twelve guys more, then they might no longer be the cheaper option. I’ll lay off eleven, buy a backhoe, and train one man to operate it.
The other problem with declining productivity is that things no longer become less costly which allowed a greater portion of society to afford the things.
It really is self defeating. However, when you redesign your economy to make money from money, then declining productivity thus declining purchasing power of the consumer is not of concern…if you have access to less costly options. Say, “emerging markets” such that you don’t need to invest in creating capital that increases productivity. Simply license the making of the product to a less expensive place to do business and import the difference.
It appears to be like increasing productivity at home, because at home the consumer can still afford the thing. Until they can’t due to declining wages from declining productivity. No fear, there is still enough margin in the thing to sell it to consumers in “emerging” markets thus offsetting the decline in your nation of corporate origin.
It all looks good to the Wall Street Dow.
That is the globalized corporation. A member of the United Corporations of Global. They don’t need capital. They have cash.
Let’s just be VERY CLEAR — productivity is NOT DECLINING.
Warren, you are right. The Y/Y change in non-farm business productivity is now 0.1%.
But I did not say it was falling– just that it was very weak.
Warren, have you ever seen a business hire a group of men to dig ditches rather than use a back-hoe.
But really, the point is irrelevant. the real point is that a major reason productivity growth is weak is that the growth in the capital stock is so weak. The example of the back-hoe is just a good and obvious way to show that if you provide a worker with better tools he will produce more.
Are you try to hijack the thread to conceal that obvious point. Or do you just not get it?
I disagree, Spencer. I think the growth in productivity is weak because we are still coming out of a recession. There are a lot of people not working, so the balance favors hiring the cheap labor over purchasing capital equipment.
Yes, if you provide a worker with better tools he will produce more, but that does not mean it is always less expensive than hiring more workers and providing them less expensive tools.
The normal cyclical pattern is for productivity to be the strongest in the first year of the recovery and to weaken as the expansion ages.
If you look at the data that is exactly what has happened. Starting in 2010, productivity growth was 3.3%,0.2%,1.0%,0.9% and 0.7% in 2014.
Technically, the NBER defines a recovery to be from the bottom quarter of a recession until quarterly real GDP exceed the previous high. That has happened and we are no longer in a recovery — we are in an expansion.
I do not understand why you are trying to disagree with me. What you just said about firms hiring cheap labor rather than buying capital equipment is exactly what I said was happening. The consequence was weak growth in the capital stock and low productivity growth.
What are you trying to say that disagrees with that?
If you want the truth and want to get out side your box please go see todays WallStreetonParade.com Pam Martens. They always give a much more clear and unbiased explanation of things and why they happen…If you cannot stomach that go see today’s Daily Kos, Paul Krugman story on SSA. and be sure to read some of the many fine comments there….
I read Krugman every day, and all Kos seemed to have is almost random quotes from him with nothing about productivity.
You say I need the truth. But I gave a very clear argument about the economics behind the weak productivity data. You have said nothing
that showed my analysis was flawed. All you have done is say you disagree and your points either agree with my points or are largely irrelevant.
I try to think you are not a troll, but it keeps getting harder and harder to think so.
Spencer, I think the reason we are in violent agreement is just emphasis.
You seemed to be emphasizing the lack of capital investment as the root cause of slower productivity growth, rather than the cheap labor as the root cause which makes such capital investment less attractive.
The direct cause of low productivity is low investments. But I agree that the cause of low investments is cheap labor.
But I posted this because the data series on net real capital stock is a virtually unknown economic series. Most people pay attention to the economic releases that have press releases –the brokerage houses created the game of betting on each economic release to generate trading volume and so boost their earnings. It is so clear that this is the direct cause of low productivity that more people need to be made aware of it.
“the brokerage houses created the game of betting on each economic release to generate trading volume and so boost their earnings.” Non-Labor/Capital intensive investments. This is a whole topic in itself and I am wondering why you have not said more about it. Every time I suggest such might be the cause, I get a cross-eyed look from those who should know this is plausible. @008 was pretty intensive betting using CDS and naked CDS.
“[More] people need to be made aware of it.”
I’m being serious here. How do you think it will change anyone’s behavior or thought pattern?
Spencer perhaps you have not read much about what automation has done to the economy. So I recommend you take a look at Martin Ford’s book “Rise of the Robots” advancing technology . Or perhaps you know what “Jidoka” means and implies. What about the moral integrity of financial greed and tyranny of corporatocracy? PCR. Perhaps you can take a look at Alan Nassar’s “New Normal” on the political economy might give you some greater insight. Political debates are really about ideology and power is money. The only cure for corporate greed is where debt is used as a weapon is the modernization and structural reforms of industry level-wide collective bargaining. Joe Stiglitz…. Do you know what “kerietsu” means an implies? If I’m a troll then you are a luddite.
Actually, Spencer has considerable knowledge in the field of manufacturing. We have discussed it to some rather great lengths and disagreed at times. I would disagree with your assessment of Spencer. If you have read some of my words on manufacturing and throughput, you would know I am not weak on the topic.
By the way, Martin Ford posted on AB for a while. Interesting person. Tom Walker alias Sandwichman of Econospeak would tell you that maybe the luddites were right given today’s circumstance.