THE BEAR'S
LAIR Baked-in
inefficiency By Martin
Hutchinson
The US Bureau of Labor
Statistics last week announced their revised
estimate for first-quarter labor productivity
growth; it was minus 0.9%. When you look around
the world, declining productivity growth is a
tendency everywhere. There is a simple
explanation: the anti-market distortions imposed
on the global economy by mistaken policy are
producing their effect in making the entire global
economic system increasingly inefficient.
The same trend is true in US multifactor
productivity, figures which were released last
month. Multifactor productivity (productivity net
of labor and capital increases) was only 2.3%
above its 2005 level in 2011, while capital inputs
to the economy were 12.6% above that level. In
other words, the rises in labor productivity that
have occurred since 2005 have been almost
entirely due to
increasing capital intensity, with genuine
multifactor productivity increasing at a sluggish
rate of below 0.4% - compared with an average of
1.1% in 1987-2005, which had been close to the
long-term post-World War II average.
I
wrote in an earlier column that exceptionally
cheap capital appeared to be boosting US labor
productivity (thereby preventing unemployment from
declining) and that I expected it to continue
doing so while capital remained cheap, even though
multifactor productivity growth was at best
modest.
This effect is the opposite of
that visible in the early 1980s, when very high
real interest rates suppressed labor productivity
growth even though multifactor productivity growth
was robust and unemployment was declining rapidly.
We now appear to have reached the end of that
phase, and to have entered an era in which US
labor efficiency declines because resource
allocation has become so distorted and
inefficient.
You can see the same effect
globally from looking at the Conference Board's
Total Economy Database's series on total factor
productivity (TFP), a slightly different
calculation from multifactor productivity which
produces different but parallel numbers.
In the US, annual TFP growth shrank from
0.66% in 1987-2004 to 0.16% in 2005-2011. In the
more successful countries of Europe, a parallel
trend is seen, with German TFP growth shrinking
from 1.11% in 1987-2004 to 0.61% in 2005-2011
(note that German TFP growth is consistently
higher than that in the US - so much for "old
Europe" theorists.)
TFP growth shrank in
France from 0.25% to negative 0.52% between the
same periods, in Britain from 0.64% to negative
0.46%, in Italy from 0.12% to negative 0.66%, in
Spain from negative 0.30% to negative 0.77%, and
in non-EU Turkey from 0.35% to negative 1.93%. In
the other Anglophone countries, TFP growth shrank
from zero in Canada in 1987-2004 to negative 0.60%
in 2005-11 and in Australia from 0.48% in
1987-2004 to negative 1.33% in 2005-11.
Outside the US and Europe, the picture is
different. In Japan, TFP growth rose from an
average negative 0.22% per annum in 1987-2004 to
0.39% per annum in 2005-2011. In China, South
Korea and India, it stayed much higher, at around
2% per annum, rising in China and India and
declining slightly in South Korea. Brazil,
however, repeated the US/European pattern,
declining from negative 0.07% per annum to
negative 0.75%, as did Russia, declining from
1.68% per annum to 0.02% per annum.
The
common factor among all these statistics is that
where interest rates have been held at
artificially low levels or government has
distorted the economy, productivity has declined.
In the US, Europe, Canada, Turkey and Australia,
interest rates have been held at levels below the
rate of inflation for almost all the period since
2005; consequently, multifactor productivity
growth has declined since that date, even though
consistent growth in labor productivity has
disguised this fact.
Real interest rates
were more solidly negative in southern Europe than
in northern Europe - they were held down
artificially by the economically suicidal
"Target/Target 2" payments system, which failed to
rebalance money flows out of the eurozone's weaker
economies.
Consequently, productivity
growth in those countries has been consistently
worse than in Germany, where very low inflation
kept real interest rates near zero rather than
negative. A further factor, especially in Britain,
the US and southern Europe, has been the
unprecedentedly high levels of budget deficits,
which have misallocated capital to the
unproductive state sector, further weakening
productivity growth.
In China and India,
on the other hand, real interest rates were
generally positive (until the last year or two in
India); consequently, production factors were less
misallocated and productivity growth remained
robust.
In Japan, real interest rates went
negative in the middle 1990s and giant government
deficits further misallocated capital. Capital was
better allocated during the Junichiro Koizumi
period (2001-06), while consumer price deflation
since then has kept real interest rates marginally
positive, thus weakening the interest rate
distortion.
In Brazil and Russia, real
interest rates have been generally positive, but
since 2002 in both countries credit has been
largely allocated by the government itself,
producing productivity drags of a different kind.
With current policies in place, the
productivity deficit is likely to get worse,
especially in the US. Gigantic budget deficits are
funded by the banking system, starving small
businesses of resources and steering funding into
the nation's most unproductive sector. Ultra-low
interest rates discourage saving, decapitalizing
the economy further and producing declines in even
labor productivity. Thus while current policies
are in place, even labor productivity is likely to
decline further, US living standards will decline
or at best stagnate and unemployment will remain
very high.
The position in Europe is even
worse than in the US. The endless "rescues" of
bankrupt southern European banks and overspending
governments will starve the most productive
countries of Europe of the capital they need to
grow. Thus malaise will spread northwards from the
Mediterranean to the northern European countries
that have so far been largely immune to the
disease.
Saving will be suppressed by the
ultra-low interest rates and punitively high taxes
imposed on the continent to pay for the profligate
governments and futile bailouts. In Britain, a
profligate Bank of England and a self-deluding
government, which believes it is achieving
austerity when it is merely slowing the inexorable
growth of the state sector, will continue to
produce mediocre although not disastrous results.
The decision by French President Francois
Hollande to reverse the single modest reform
carried out by his predecessor and allow the
French retirement age to revert from 62 to 60 is
symptomatic of the self-defeating attitude of the
European political class. They will subsidize the
unproductive at every point, even when there is no
possible actuarial justification for doing so,
while imposing wealth taxes, ultra-high rates of
income tax and innumerable pointless and costly
regulations on the productive sectors.
The
European political class does not deserve to live
in successful productive countries; the problem is
that, like Germans forced by their politicians
into abandoning the deutschemark for the euro,
Europe's citizens as a whole are not given the
option of voting for anything else.
Outside Europe and the US, the picture is
a little brighter. Russia and Brazil will show
themselves as the economic basket-cases to which
their lousy governments have reduced them. However
India and China may do a little better, if only
because their citizens are still so poor that
there is room for growth in spite of the failings
of those countries' governments. Wealthy East
Asia, being well run and having avoided the
Western diseases of too low interest rates and too
much government spending, will continue to get
wealthier. Latin America will separate itself
further into the Hogarthian Industrious
Apprentices of Chile, Colombia and maybe Peru and
the Idle Apprentices elsewhere in the continent.
And African countries in which even the most
modest capitalist flowers are allowed to bloom
will continue doing considerably better than they
did in the lost decades before 2000.
All
governments claim to revere productivity, but in
the US and Europe, they are going the wrong way
about getting it. Subsidizing the useless
(including the ineffable rat holes of the "green
energy" sector) while taxing the productive, and
keeping interest rates for years on end at levels
that penalize the thrifty, cannot be expected to
produce higher productivity and is not doing so.
While current policies persist, those regions'
economic decline will continue.
Martin Hutchinson is the author
of Great Conservatives (Academica Press,
2005) - details can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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