The Problem with Productivity

I may have mentioned before that I stay in contact with a number of friends collectively known, at least among ourselves, as the “Mutants of the Round Table.” Our group appellation has nothing to do with Arthurian legend. It derived from us meeting in the cafeteria of the office complex where we all once worked and sitting at a large round table for lunch. There we would discuss weighty issues of politics, philosophy, religion, and other things geeks talk about among themselves when there is little chance of offending ‘normal’ people. Occasionally, other subjects would come up — things like women or sports, but as many of us were relatively unfamiliar with these or found them less interesting, our conversations about them tended to be brief. We’ve gone our separate ways since then, but we keep the email conversation going. There are still world problems to resolve.

We are not a diverse group. We are all white, college educated, and male. Despite these similarities, we have varied political and philosophical outlooks and our conversations can become heated. When especially incensed, some of us have been known to RESPOND IN ALL CAPS – sometimes even ending with an exclamation point! Yes, we can be an impassioned and opinionated bunch.

One topic that resurfaced recently was the economy. This one comes up a lot. We all have ideas about what should be done or not done to fix things – including those who don’t believe anything needs fixing. I’m in the camp that sees a fundamental problem and I hope there is something I’m missing.

Let me take a moment to digress here. I read a lot of science fiction. I especially enjoy tales that look at current events and extrapolate what the future might hold and how people respond to changes that occur over time in science, technology, politics, or belief systems. Normally in such stories, as in real life, a culture will survive if it can adapt to change. If it cannot, it collapses. (I prefer those stories in which people show enough intelligence to prevent catastrophe.)

(Yeah, I do have a point and I plan to get to it soon. It’s not funny or related to my books, writing, or anything like that. This post falls into the category of ‘things that momentarily excite, annoy, or distract me.’ Feel free to skip it, but thanks for sticking with me this far. I’m sure I lost all the non-geeks a couple paragraphs ago. I probably need to figure out a way to put more sex and sports in these things.)

I believe we (the U.S.A., Europe, and the U.K. especially, and soon the rest of the world) may have an emerging economic problem related to our success and we will need to adapt to deal with it. High unemployment might be a symptom of this.

(Just another digression. I’m especially peeved about unemployment because my son who recently earned a Master’s Degree in Aerospace Engineering can’t find a job in the field and he has student loans to pay. If anyone can offer him a job building spaceships, I’d appreciate it. His thesis was on nuclear powered spacecraft, and I have no doubt he could design anything from a robotic asteroid miner to a multi-generational interstellar starship. He’s a bright lad and quite good-looking, too. He takes after his humble dad. His likeness appears on the cover of my book ‘The Warden War.’ But enough of that. Now, back to our previously scheduled blog post.)

The success I’m concerned about is productivity. In terms of human work hours per unit of production, we have made great improvements in productivity since the industrial revolution in all areas I can think of. Whether we are talking about a piece of hardware, transportation of a product, a ton of food, an article of clothing, or pretty much anything else, it takes fewer hours of human labor to produce now than it did before, and those productivity improvements are continuing in many areas. We’ll probably never get to a point where it will take no human labor to produce everything we need. Unless somehow we have robots doing everything, to include designing and building new robots, people will still need to be productively employed. In the future, however, it seems likely that we will be able to make whatever we need with less human labor than it now takes.

So why is this a problem? It’s not, or at least it doesn’t need to be. Productivity improvements have led to items costing less. Most people really can now have ‘a chicken in every pot and a car in every garage,’ as Herbert Hoover summarized prosperity in his 1928 Presidential campaign slogan. People have benefited, their lives have improved, and all we have to do is continue on like this, producing more and consuming more until everyone can have an infinite number of chickens and cars, right?

Well, no. At least, I don’t think so. The more production / more consumption train can’t go at full speed forever. Resources are one limiting factor. If we could continue to consume as much as we could make, we’d eventually run out of the resources to do so. Even if resources were infinite, though, we would still have a problem.

No matter how productive we become and how inexpensive we make things, there will be a point of market saturation. Even considering population growth, there are only so many things people are likely to buy. Certainly, creative advertising can entice us to spend vast amounts of money on things we don’t need, but even incredibly rich people who have more dollars than sense can only buy so many houses, cars, or yachts.

The problem we may have in the future if productivity continues to improve is that we will have the ability to make all things we might need except for people able to buy them. By making more stuff with fewer people, we will end up with a surplus of both stuff and potential buyers for that stuff, at least from a free market perspective.

From a purely economic standpoint, businesses are motivated to produce as much as they can sell, to employ only the number of people needed to make those items, and to get as much production from each employee as possible. They will not make things they can’t sell and they will not employ people they don’t need.

You probably see what I’m getting to, but I’ll try to summarize a bit. Let’s say you are an automobile manufacturer. You will produce as many cars as you can sell, right? So let’s say that in 1920, it took one-hundred hours of labor for you to make a car. In order to keep selling cars, you need to produce them as efficiently as possible because if you don’t, your competitors will. That’s all well and good, and it encourages advancements in technology. You’re successful, you embrace new technology and methods, so by 2020, you can produce a car with only ten hours of labor, and it’s a much better car. (Note – these are not actual figures.) There is no problem so long as the demand for cars continues to increase. With greater productivity, you increase your production far more than you increase your workforce. This increases profits and makes your investors and managers very happy. But eventually, everyone who wants a car has one. They replace them when they can afford to, but your slacking customers are not producing new consumers as fast as you need them to. Your market has plateaued, but your productivity improvements have not because you are still motivated to be more productive than your competitors. The only way to increase your share of the market is to take it from someone else. Some companies will continue to grow but only at the failure of others. Regardless of which companies come out on top and which go under, eventually, the industry overall will have to reduce its workforce.

But those who end up out of a job as a result were not just workers, they were also consumers, and without a job, they are likely to be consuming far less.

No problem, right? They’ll just get a different job. But all other businesses have the same motivation to improve productivity, and they, too, can find themselves requiring fewer workers to produce all they can sell to meet a now shrinking demand. The result, if you stick with our current definitions for ‘fulltime’ work and compensation, is increased unemployment and shrinking demand, which dominoes. The workforce shrinks, causing the market to shrink, causing businesses to cut back, causing the workforce to shrink again…. One can only increase the market so much, and no matter how good your advertising is, you can’t sell to people who don’t have jobs or money. It’s like telling the peasants to ‘eat cake.’ I’m sure they’d love to, but they can’t, so they don’t.

The problem isn’t productivity per se. Increased productivity allows us to produce more with less labor. Who would say that’s a bad thing? The problem is that we see labor as a cost of production to be minimized and profit as the thing we want to maximize. Instead of filtering productivity benefits to the actual people who produce things, it turns into profit for owners and managers who must reduce their labor force to remain competitive and keep their profits flowing as long as possible.

At this point, the most conservative of the Mutants would probably argue that the owners will use that money to buy things like yachts and planes and that will create jobs. Yes, a few. But use the same amount of money to keep a thousand people employed, and they’ll buy a thousand homes, and a thousand cars, and keep local small businesses open. They also won’t be drawing unemployment or welfare and will be less likely to resort to crime. In terms of best use of capital for the overall economy and society, there’s no contest.

“Ah, but you can’t do that,” he might say. Why would anyone hire more people than  they need even if they did have the money to do so? It makes no sense. And, of course, he’d be right if labor hours per employee were fixed, but they’re not.

The ‘normal’ eight-hour workday is a fairly new idea. Up until late Nineteenth Century, a ten or even twelve-hour workday was common and worker benefits were rare. But increases in productivity allowed the possibility for shorter work hours. Of course, businesses had to be willing to share the benefits of increased productivity with their workers rather than reap all of the benefit as profit. Many would not do this willingly. Workers had to strike for an eight-hour workday. The most famous such strike, perhaps, was the 1886 Haymarket affair in Chicago, which ended quite messily and which is now commemorated each year by International Workers’ Day on the first of May. (Oddly enough, it is not so recognized in the U.S.A., which celebrates ‘Labor Day’ in September instead.)

My point here isn’t that workers need to unionize or strike for shorter work hours. My point is that a shorter workday may be one way to avoid unemployment and economic problems resulting, ultimately, from increased productivity. A market economy is, at the core, a balance of production and consumption. It is people earning money by producing goods and services and exchanging that money for goods and services provided by others. From a narrow, individual perspective, both that of a worker or of a business, the goal is to maximize the amount of money earned and minimize the amount of money spent to buy what you need or want. From a broader societal perspective, the goal is go keep everyone employed so that the production/consumption cycle is not broken. When the amount of labor required to produce everything needed falls, the best course of action for a business is to reduce the number of employees. The best course of action for the society at large, however, may be to reduce the number of hours each employee must work for the same pay and benefits. At least, that’s how it appears to me. The advantages to such a strategy seem obvious so I won’t belabor them. The only disadvantage I see is to business profits, which, at best, would be short term if they were gained at the expense of employment.

Of course, worker pay and benefits, if such exist, must be retained at least at present levels, though. Many companies, especially retail stores, already limit the number of hours per employee so they won’t be considered ‘fulltime’ and therefore eligible for benefits such as medical insurance or paid holidays. This makes perfect short term sense for them. They can reduce the cost of labor overhead by hiring more people who each work fewer hours. Reducing the number of hours people work each week may be necessary in the future, but it must not come at the cost of worker pay or benefits. From a purely economic standpoint, this makes the employees poorer consumers.

Another possible mitigating strategy might be to lower the retirement age so that people can retire earlier and open jobs for younger folks. I just don’t see a realistic way to do either of these things, though, because both will cut into short-term business profits, and business profits, at least in the U.S.A., have somehow achieved a sacred status that lowly workers must admire from afar but dare not touch. I’m fairly sure nothing will be done anytime soon that might adversely affect them, so I’m doubtful that our society can adapt to the economic changes caused by increased productivity. If something like this does not happen, though, I can’t see how increased unemployment and a declining economy can be avoided without a whole lot of government spending, which is also unlikely given the current political environment. But that’s another issue and one I won’t rant about, at least not here.

As you may have probably surmised by now, the Mutants can have rather long, esoteric emails. I will try not to write any more posts like this, but this issue has been on my mind recently, not as something I can do anything about but mainly as an intellectual and philosophical question, as are most of the things the Mutants discuss. In any event, I promise my next blog offering will be much more fun and related to books and writing.

The Economic Elephant in the Room

  Everyone is talking about the economy so I see no reason not to voice my inexpert opinion since obviously our politicians have no more of a clue about how to fix this than I do.  Whether that’s because economic experts can’t agree, the politicians aren’t listening to them, or because our elected officials are too busy playing dogmatic partisan politics and have lost whatever tenuous hold on reality they may have once had, I don’t know.  I’d love to say I don’t care but I do because they, sadly, hold our nation’s future in their hands.

I’m beginning to suspect there may be something wrong with our system, which seems to frequently place incompetent ideologues in positions of political power.  Sometimes I think those seeking political office should have to pass some kind of test on basic intelligence, law, history, science, and the Constitution before they can run.  Look at C-SPAN sometime and see if you don’t agree.  But this is extremely unlikely since I can think of no one objective and trustworthy enough to develop and score the tests and, of course, those in power now would have to pass a Constitutional amendment to require them.  This isn’t going to happen.  All any of us can do now is try to understand what might be going wrong with the economy so we can at least say we saw the license plate of the truck that hit us.  So, for what it’s worth, I’m going to take a shot at it using some basic fundamental principles that are simple enough for even an amateur philosopher to understand.

1) Spending:  If you make less, you must spend less.  If you make more, you can spend more.  Putting it another way, you have to pay for what you buy.  Like I tell my kids, if you can’t afford it, don’t buy it.  Never spend money you don’t have to buy stuff you don’t need and don’t use credit unless it’s for a critical investment (like a house) or an emergency – a REAL emergency (we’re talking ambulances and hospitals here or maybe a car repair, not new shoes or a latte at Starbucks).

I know this philosophy doesn’t actually extend beyond personal finances to governments but I think there must be similarities.  It seems our elected representatives in Washington don’t agree.

As a starting out point, let’s look at US federal government expenditures since 1980.

US Federal Government Spending:

Clearly spending has been going up.  This doesn’t surprise or outrage me though because at the same time the population has gone up from 229 million in 1980 to 309 million in 2011, and the Gross Domestic Product, which is the estimated sum of all the goods and services produced in the country, has risen as well.  Providing essential governmental services to more people producing more things will, quite logically, cost more.  There is no big surprise here although I do have to wonder why expenditures have gone up more steeply than either population or GDP.  The table below shows how the GDP has more than doubled since 1980.

US GDP:

2) Income:  The second part of the equation is income.  Unlike us puny mortals who must rely on our own competence, luck, and the largess of our employers, to determine our incomes, the government can pretty much decide how much it makes by adjusting taxes.  As with spending, I would expect tax revenues to go up with the population and the GDP.  Surprisingly, they don’t.

US Federal Government Revenues:

There is a big dip (no pun intended) after 2001 even though there is no corresponding dip in either GDP or expenditures.  Population, GDP, and expenditures all continued to grow while at the same time the government chose – yes chose – to take in less.  I will assume this was a result of tax breaks but if those were intended to spur the economy and increase GDP, they don’t seem to have had much, if any, effect.  The rate of GDP growth actually appears to have slowed slightly after the decrease in federal revenues.  I don’t know if there is any cause and effect relationship here.  What is clear though is that decreased taxes had no noticeable effect on increasing the GDP.

Now a quick comparison of revenues and expenses as a percentage of GDP in the chart below shows that starting in 1998, the US seemed to be getting its fiscal house in order.  It was actually taking in more than it was spending.  This is the enviable position a lot of families would love to be in right now; one in which there is extra income to pay down their debt, make some overdue repairs, and maybe even invest in the future by starting a business or sending a family member to college.  I would think this condition would offer similar opportunities for the government.  Unfortunately, it didn’t last long.  After 2001, you can again see how federal revenues (this time as a percentage of GDP) dived while expenditures once again started to climb.

 

 

 

 

 

 

 

 

 

 

3) Debt:  After 2001, the U.S. Government made at least two seemingly real stupid economic choices; it chose to spend more and it chose to earn less.  The only way to do this is to borrow more money, so it did.  It borrowed from its own citizens as well as from other countries, and, I think, from our future as well.  Today over 12% of what the US government spends (some of which is more borrowed money), is spent on interest.  Think about that.  More than twelve cents out of every dollar the government spends goes not to protecting American citizens or modernizing the infrastructure to help people conduct business or move products.  It does not go to education so our children can successfully compete in a global economy or help old or sick Americans who have already done what they could.  It is not available to create jobs or help Americans seeking work so that they too can provide for their families and help grow the country.  It pays for poor choices of politicians who failed to realize that there is a cost to fiscal irresponsibility.

You can’t keep doing that and as much as I think some of the Tea Partiers are about as screwy as you can get, they’re right about that at a very basic level.  They’re wrong at another fundamental level however.  Just reducing government spending does not solve the problem.  Actually it is exactly the opposite of what needs to be done because the problem isn’t the debt, it’s the economy.  The debt is like a knife in our chest but pull it out too quickly and we’ll bleed to death.

4) The Economy:  The nation’s economy is driven by spending.  When all is said and done, that’s what the economy is – people exchanging money.  If you take out piracy, theft, plunder, tribute, and other time tested but (hopefully) outdated ways of bringing in capital, this means that goods and services must be produced and sold, either domestically or to other countries.  The trouble is that consumer spending is currently down.  People are tightening their belts.  Median houshold income adjusted for inflation has gone up only about 3% in the last thirty years and may now be declining, unemployment is relatively high, and many people are already seriously in debt.  Average citizens are apparently just a bit brighter than the average politician because they know they can’t keep spending more than they make.

This has a domino effect.  With consumer spending down, businesses produce less because of the lower demand for their goods or services.  They hire fewer people or perhaps layoff current workers.  This increases unemployment, further reducing consumer spending, and things can spiral down from there until something happens that leads to renewed spending.  Neither private companies nor multinational corporations are likely to hire workers to provide services or to produce products for which they see insufficient demand and no amount of tax breaks or government subsides will encourage them to do so.

But if American consumers aren’t spending, who can?  Well, people in other countries, and we do sell a lot of stuff abroad.  But the rest of the world (for the most part) is having economic problems as well.  Even China, which I believe holds about 8% of the American debt, probably can’t provide the market we need.  Yes, they have a lot of capital and we sell them a lot of debt but our trade balance with them currently tilts heavily the other way.  I’m sure they consider our debt a good investment and are happy with the reliable interest payments we make to them but they produce most of the things they need themselves and are planning on producing more consumer goods for domestic consumption so I wouldn’t look to exports to jumpstart the American economy.

It’s at times like these that governments should step in and spend, whether that’s on the military, the infrastructure, tuition grants, research, or direct government employment matters but it matters less than actually creating jobs and encouraging consumer spending.  This is the kind of emergency that governments should, if necessary, borrow money for.  Unfortunately political decisions from at least 2001 have already left the government deeply in debt and there is a lot of political pressure to reduce borrowing.

What does that leave?  Well, the richest Americans – those making $380,000 or more annually – have seen their incomes grow 33% over the last 20 years.  They have benefited out of proportion to average Americans because of past fiscal policies so it seems only fair to me that they be approached now to help.  Tax breaks for the wealthy must be allowed to expire, unnecessary subsides to corporations must be eliminated, tax loopholes must be closed.

Decreasing government spending is exactly the wrong thing to do at times like this.  Money needs to be spent by someone and it seems as if government is the only entity that can do that now sufficiently to spur the economy.  The government is a very potent job creator.  Government purchases and contracts with private companies for services for everything from office maintenance to military logistical support provide employment for many.  The government needs to increase its revenues and it must spend that money domestically.  It will still take a long time to recover, but if this money is spent wisely on things that further contribute to economic expansion we can succeed.

Anyway, that’s how I see it.  Disagree if you wish.  Speech is still free.  Most everything else costs money.