No Surprise Productivity Growth is Slow
The following graph shows a pattern of productivity growth through a business cycle. The graph plots my UT index against Year over Year % change in productivity for the past 41 years. (Link to FRED data for graph, 1974 to present)
The UT index is a measurement of effective demand. It measures the difference between effective labor share and the composite utilization of labor and capital. The UT index is mostly a measure of spare capacity. As the UT index falls to zero, the business cycle is maturing and coming to an end. As the UT index average rises from zero, a business cycle is going through and recovering from a recession.
The orange line is data from 1974 to 2001. The high portion of the orange line where the UT index goes over 19% happened during the Volcker recession. That portion shows high spare capacity but low productivity growth. It is an anomaly because the recession was induced.
The blue line is data since 2002. The red dot near the crossing point of the axes shows the current data point for 3Q 2015.
The plot moves within the shaded area. For instance, if you expect to have productive growth of 4%, data shows that you need to have a UT index of spare capacity at least 6%. Also, if you have 0% growth in productivity, you can expect to have less than a UT index of 7%.
On the other hand, if I see a UT index of 1%, I would expect productivity growth to be between 0% and 2%. If I see a UT index of 10%, I would expect productivity growth between 2% and 5%.
The general trend is that productivity will increase when more spare capacity opens up in a business cycle.
Looking at the position of the red dot of current data (1% UT index, 0% productivity growth), there really is no surprise that productivity growth is low.
I think the story is simpler than this. The closest analogy in recent times to what we’re seeing today was the very low productivity spell in ’93-’95 , following the S&L debacle , which had similar after-effects as the subprime bust ( deleveraging , tighter credit , etc. , leading to a lag in demand pickup) , but to a lesser degree. Of course , this time there’s no dotcom boom in the works to drive tight labor markets with resulting broad-based wage gains , which would generate the demand that would allow realization of latent productivity.
If we want to see a spike in productivity , all we need is a recession. It works every time , as layoffs and reduced hours boost output per hour of those who remain employed.
Here’s productivity in blue ( left scale ) and y-o-y % change in hours in red ( right scale ) , but inverted , so that the positive spikes in the red curve represent layoffs and reduced hours :
We prove that we’re still productive with every recession. The productivity doesn’t last , because the demand isn’t there , or the demand is bubble-based , which also doesn’t last.
We have massive over-capacity , locally and globally , relative to the demand capacity of average consumers. The steady increase in employment we’ve seen is either due to faulty expectations of employers , or to gov’t incentive-based hiring schemes , etc. , rather than a calibrated response to stronger demand.
In most cases , in most industries , workers aren’t working hard , they’re hardly working.
This “in most industries , workers aren’t working hard , they’re hardly working.” is poorly worded or I am not sure you actually want to say it in this manner.
I read in Marko’s words there that workers are less needed.
I just thought it could be worded better.
Right with ya…
You are partially correct, Marko, that “We have massive over-capacity , locally and globally, relative to the demand capacity of average consumers.”
In other words, consumers don’t have enough money to buy, at a high enough price to ensure profitability, all of the products that have been produced.
Where is all of that money? Some of it is sitting in the hands of the wealthy, for sure. And yes, a very small part of the problem is that the wealthy have a much lower propensity to consume AS CONSUMERS.
But the wealthy are not just consumers. They are producers too. That’s what having wealth beyond their needs for personal consumption allows them to do. What the wealthy do not buy as CONSUMERS, they “should” (in theory) buy as producers. It will be a different basket of goods (fewer consumption goods, and more things that can be used as means of production), but the wealthy “should” in theory be using this money at all times for SOMETHING. Money sitting in a vault does nothing, and any rational capitalist avoids hoarding money for too long in this state.
Money loaned out to a business (whether through a bond or equity purchase) or to the government (through a treasury bond) just pushes the question back one step: now it is those entities (businesses and government) that “should” in theory be using what money they have at all times for SOMETHING: either to buy production goods (in the case of business) or consumption goods (in the case of government).
So, according to this line of thought, there is no reason ever why all of society’s products should ever fail to get completely bought up. There “should” never be any overcapacity or “overproduction” that is contingent on inequality. It “shouldn’t” matter whether working-class consumers are spending the money on consumption goods, or whether wealthy entrepreneurs are spending the money on production goods. Someone should be buying the goods.
Now, maybe there could be a disproportion of too many consumption or production goods produced relative to the other. If income shifted suddenly in favor of workers at the expense of the wealthy, then there would be a shortage of consumption goods and a surplus of production goods. But prices would adjust, profit incentives would adjust, and capitalists would start producing more consumption goods and fewer production goods. That particular problem of disproportion should fix itself quite quickly without the need for crisis and stagnation.
If the wealthy ever have to rely on credit to finance expansion of the means of production, then that is a sign that EVEN THEY do not have enough money to buy the goods that society has produced that they could use for expanding their production. In this sense, they have the same problem as consumers do when consumers cannot finance their consumption except through credit. If both producers and consumers are systematically going into debt, then that is a sign that there has *somehow* been an absolute overproduction of both types of goods (consumption and production goods) at the same time, relative to society’s ability to buy those goods at profit-yielding prices.
In the run up to the Great Recession, the use of credit among producers and consumers to purchase production and consumption goods (respectively) expanded enormously. Increasingly, there was not enough real money to purchase all of the goods that were produced, so credit had to be introduced to fill in the gap.
An expansion of credit cannot go on forever. Not only does it get riskier and riskier the more the chain of payments is balanced on top of a pyramid of credit, but there is also the problem that the interest rate that money-lending capitalists charge industrial (entrepreneurial) capitalists increases. Money-lending capitalists can get away with charging the entrepreneurial capitalists higher rates in these circumstances because money is in much higher demand, and interest is the “price” that one can charge another for the use of the money’s services. Soon, the interest rate that entrepreneurial capitalists have to pay starts cutting into their rate of profit too much to make production profitable.
You might ask: “But, if producers and consumers simply needed more money to purchase all of the goods that had been produced, then why was an expansion of credit needed? Why did the Federal Reserve let money become scarce, and thus let interest rates rise? Why didn’t the Federal Reserve print more money so that: 1. interest rates wouldn’t rise as much, and 2. producers and consumers could buy all of the products that society had produced?”
Unfortunately, the Federal Reserve cannot print money, because real money is commodity-money. This is a point that is going to go right over the heads of neoclassical economists, but it is unfortunately true.
But let me repeat that one more time: THE FEDERAL RESERVE CANNOT PRINT MONEY.
What the Federal Reserve can print is monetary tokens (dollars). Dollars are token-money, not commodity-money. Token-money in circulation represents commodity-money, and promises to be redeemable for commodity-money at whatever the going ratio is between the token-money and the commodity-money.
This ratio used to be one that was fixed and held stable by governments who would only issue a certain amount of token-money for every increment of commodity-money (gold) that those governments had in their vaults, ready for people to come in and redeem their token-money for commodity-money. It used to be that the Federal Reserve would issue only 20 dollars of circulating tokens for every ounce of gold it had in its vaults, ready to redeem those ounces of gold for those 20-dollar bills to consumers who wanted to come in and exchange their token-dollar-money for real-commodity-money—that is, gold. Now, governments allow the ratio between token-money and commodity-money to float all over the place, and instead it is now the token-money price of consumer goods that Central Banks try to keep stable.
Token-money behaves differently than commodity-money. Token-money adheres to the “quantity theory of money,” which states that, as the amount of tokens in circulation increases, the purchasing power of each token will decrease proportionally. There being more tokens in circulation, and no change in the amount of real commodity-money that those tokens represent, the amount of real commodity-money that each token represents will decrease. Each token will be worth less. In other words, there will be inflation of prices if prices are measured in terms of that token money (whereas prices will not be inflating as measured in terms of the real commodity-money. Another way of saying this is, dollars will depreciate against the commodity-money, and the commodity-money will cost more in dollar terms).
This is why the Federal Reserve could not, in the run up to the Great Recession, service society’s need for more money to buy the products that had been produced. Trying to print more dollars in order to drive down the rate of interest would have sparked massive inflation, as in the 1970s. Printing more dollars does not actually increase society’s purchasing power of goods because the dollar-prices of all of those goods will inflate proportionally, thus requiring even more dollars for society to purchase all of them, and so on….
But why has the Federal Reserve been able to print dollars since the Great Recession with abandon and not cause inflation? (And by the way, I know that the Federal Reserve is not actually the one physically in charge of printing the dollars (rather, it is the Treasury Dept). But the Federal Reserve basically decides how many dollars are to be printed and injected into the economy).
Who says there hasn’t been inflation? The prices of goods should naturally fall as production becomes more efficient. Consumers have seen this effect in home electronics over the past 20 years. As the production of computers became more efficient, their prices went down, even in dollar terms (but even more in terms of commodity-money prices—the gold prices of computers).
The prices of goods have fallen substantially over the last 8 years in terms of commodity-money prices. It takes much less commodity-money—much less gold—to buy, for example, an automobile now than it did in 2007. The production process of building an automobile has continued to get more and more efficient in those years, partly thanks to better and better automation, and partly due to layoffs during the Great Recession leaving only the most productive workers behind.
And yet, as the prices of goods have fallen in terms of commodity-money, those prices have not fallen, but instead continued to rise in terms of dollars. There is your inflation.
The Federal Reserve cannot print even more token-money, or else inflation will start showing up even in terms of dollar prices (not to mention in terms of commodity-money prices!)
And the Federal Reserve cannot print (real) commodity-money because commodity-money must be mined out of the ground and sold on the market as a commodity to function as commodity-money.
And so, what society ends up with is too many goods produced, and not enough real commodity-money (gold) to purchase all of those goods. The commodity-money (currently gold) is “scarce” relative to other commodities. (Actually, this held true for the economy leading up to the Great Recession and is what caused the Great Recession, but technically it does not hold true at the moment. At this moment (2015), commodity-money is NOT scarce relative to the goods that it needs to be able to purchase in society. You can tell because interest rates are very low. There is plenty of commodity-money at present to purchase society’s goods, such that people are NOT desperate to pay high interest rates to get their hands on whatever money they can in order to make those purchases.)
But unfortunately, commodity-money DOES NOT adhere to the “quantity theory of money” like token-money does. When commodity-money is scarce relative to the goods that this commodity-money needs to purchase, the “price” of commodity-money does not go up. Goods do not decrease in commodity-money-price down to the level where there is once again enough commodity-money to purchase all of the goods.
Instead, the interest rate goes up, as people (businesses and consumers) become desperate to pay any high interest rate in order to get their hands on this commodity-money in order to purchase the goods that society has produced.
As the interest rate goes up, it becomes harder and harder for entrepreneurs to operate businesses successfully on the basis of loaned capital. Businesses must close down. The supply of produced goods goes down. In this way, the imbalance between too little commodity-money to purchase goods, and too much of those goods, is corrected.
But, instead of the supply of commodity-money being RAISED to the level where there is enough commodity-money to buy the existing output of goods, the output of goods has to be LOWERED to the point where there is once again enough commodity-money to purchase all of those goods.
This is how society under capitalism deals with the problem that Marko pointed out—that “we have massive over-capacity, locally and globally, relative to the demand capacity of average consumers.”
That demand capacity simply CANNOT BE INCREASED, whether by printing more token-money, or by government deficit spending (which is just another type of unsustainable spending on credit). Instead, the over-capacity must be reduced—by layoffs, idled machinery, and/or forced destruction of that machinery (war). Then the production of goods will once again be lowered so that there is enough “demand capacity” (commodity-money) available to purchase those goods.
If that sounds ridiculous and absurd, then don’t blame me. Blame capitalism for being a ridiculous and absurd system that hamstrings our ability to buy goods that have already been produced by pegging that “demand capacity” of ours to the level of commodity-money (gold) that is being produced.
For more explanation of this line of thinking, see Sam Williams’ blog post on commodity-money at:
Your logic does not hold up when you say… “So, according to this line of thought, there is no reason ever why all of society’s products should ever fail to get completely bought up. There “should” never be any overcapacity or “overproduction” that is contingent on inequality. It “shouldn’t” matter whether working-class consumers are spending the money on consumption goods, or whether wealthy entrepreneurs are spending the money on production goods. Someone should be buying the goods.”
When the wealthy use their money for production goods, for whom will they be producing more? For the people with less money? Ultimately they do not invest as much because of weak labor income. This is part of the reason for weak inflation. Less money chasing more goods. So yes, ultimately there will be excess unneeded capacity due to inequality. It is happening in China too.
And I see the end of your comment where you talk about over-capacity and how to deal with it.
Happy Thanksgiving Edward. Good to have you around AB
Happy Thanksgiving Mr. Kane. A long post for a first one at AB.
“When the wealthy use their money for production goods, for whom will they be producing more? For the people with less money?”
Good question! And the answer is no, not for the people with less money. For the people with more money, of course!
The wealthy will purchase production goods to produce more production goods for…other producers…who, in turn, will purchase those production goods to produce production goods for…other producers, and so on.
Yes, if you held working class pay constant for years on end, the economy could instead focus on using its increasing production to…build more machines, in order to…build more machines even more quickly, in order to…build more machines even more quick…and so on.
“But why will this machine-building be profitable?” Because there will be plenty of buyers for these machines. Those buyers will be capitalists who want to buy more machines so that they themselves can…produce yet MORE machines for other capitalists who want to use those machines to get even more deeply involved in the profitable business of producing machines.
Provided that workers are paid at least the minimum of subsistence that would allow workers to maintain themselves in physical and psychological health so that they can continue to work, there is no reason why everything else cannot be plowed right back into “production for production’s sake” in the manner described above.
It is an unwarranted assumption that all capitalist production must eventually serve some subjective human desire or need.
Sam Williams – Critique of Crisis Theory – Underconsumption
You can verify this mathematically if you separate out production into a “Department I” that produces means of production, and a “Department II” that produces means of consumption.
Henryk Grossman – Law of the Accumulation and Breakdown – 1929
As Otto Bauer’s reproduction tables showed, there is no reason having to do with the “underconsumptionism” of the working class for why production cannot continue to expand indefinitely with the subsistence of the working class held constant. The main effect of holding working class pay constant while increasing total production is that more and more production, proportionally speaking, shifts from “Department II” to “Department I,” from producing means of consumption (which becomes less profitable) to producing means of production (which becomes more profitable). Those increased means of production will then go on to mainly produce even more means of production…and so on.
Now, I don’t want to argue that this process can go on forever. (Indeed, the Grossman paper linked to above identified one factor that would inevitably take down this process of expanded capitalist reproduction under the assumptions above—but it had nothing to do with the under-consumption of the working class, but instead with the rising organic composition of capital and a general fall in the rate of profit in all lines of production.
And then there is still the problem that I identified in my previous post that all production is ultimately held up by the amount of commodity-money produced, so that produced goods will not be able to be profitably sold unless there has been enough commodity-money produced in order to buy those goods).
But the point is that it is NOT under-consumptionism in particular that causes capitalist stagnation and crisis. All other things being equal, decreased consumption by the working class can be compensated by increased consumption by Department I industries that produce more means of production, which can then be employed to produce yet more means of production, and so on….
“here is still the problem that I identified in my previous post that all production is ultimately held up by the amount of commodity-money produced, so that produced goods will not be able to be profitably sold unless there has been enough commodity-money produced in order to buy those goods).
You seem to be saying that owners of the means of production (minus labor) will take in each other’s laundry in a continuing circular motion increasing production with each step. Did I get that right?
This is incorrect. You mean it has “slowed down”. But real productivity has actually remained elevated from the 1945-95 trendline. It has also accelerated in 2015.
If anything, productivity needs to slow down.
Who are you addressing?
Happy Thanksgiving. You can be a little verbose if you care to. I would like to read more of what you have to say.
I didn’t intend to imply that I think workers have all suddenly become lazy , but I did intend to stimulate people to think about what they might be observing in their own workplace. Anyone who works in a service field , for example , recognizes the difference between times when customers have to be scheduled , sometimes days , weeks , or months in advance , and times when they can be serviced this afternoon , or in an hour or so , or this very minute. I suspect most would agree that current times ( presumptively mid-cycle ) are more like the latter than the former.
Another sign that the employment gains we’ve seen might have been due to unrealistic employer expectations of future demand is the unfolding data on inventory-to-sales ratios :
You were fine. I was just wondering what you meant.
“a service field , for example , recognizes the difference between times when customers have to be scheduled , sometimes days , weeks , or months in advance , and times when they can be serviced this afternoon , or in an hour or so , or this very minute.” Infamous Call Center project for black belts. Do the same for changing over shop floors to meet seasonal product and allocating capacity.
Automotive almost always build to a 60-90 inventory of vehicles some of which like the pee-yellow ones they end up off-loading at greatly reduced pricing.
This is the stuff which I do Marko in manufacturing.
Happy Thanksgiving Marko.
CitizenCoKane’s description of an economy based on the production of machines which produce more machines, reminded me of some discussions that I had with my US Army buddies, decades ago.
We theorized that there was plenty of easy money to be had in farming. The trick was to produce a crop that would quickly flood the consumer market for that particular farm product.
We homed in on gourds, figuring that the market for gourds must be very small. So buy a small farm, grow acres of gourds, flood the market, and petition the US government for subsidy payments to not grow as many gourds. Then we would use those subsidy payments to buy more land to grow more gourds. Eventually we would be NOT growing gourds on thousands of acres and getting richer every year.
This discussion usually took place after consuming a few beers. In fact I never heard that discussion when we were stone cold sober.
Of course CitizenCoKane is telling us that all of these machine makers will actually find willing buyers for their machines. The requirement that there actually be willing buyers for all these machines is a SEVERE limitation. It is one thing to say that there will always be willing buyers, and quite another for there to be an infinite supply of willing machine buyers.
At some point, at least some of those machines will have to provide some non discretionary goods to human beings. And those human beings will need enough income to buy those goods. Otherwise those human beings will do things the old fashioned, much less efficient, way. (Productivity be damned!) And then those machines will accumulate in a scrap yard. And without adequate consumer income, discretionary purchasing would disappear first.
About 70% of the US economy is based on consumer spending. Reducing discretionary consumption a little is going to push our economy a little closer to something like a third world economy.
Consumers can not spend what they do not have, and producers will not produce what they can not sell.
A little story for you on cornering the onion market along the lines of what you suggested: http://www.npr.org/2015/10/22/450769853/the-great-onion-corner-and-the-futures-market I agree on your latter statement also. You can not always dump product just covering fixed costs.
Happy Thanksgiving Jim