The decline in productivity, first noted 15 months ago, is starting to become a serious issue. It is true that an increase in GDP is most likely and most sustainable when the output for every worker constantly goes up. But over the last year, we’ve had a sustained drop of 0.4% annualized.
The message is starting to creep into popular media. A scapegoat now has to be found, lest our politics actually focus on something real and useful. The blame for this decline now falls on smartphones – especially in the hands of those slacker Millenials.
Those kids! They just won’t get off our lawn. Or put down their phones and start mowing it, something like that. We’re never sure. What we do know is that rather than discuss economic trends we now have someone to blame so we can divert our attention from reality. This is just in time for the problem to solve itself.
Barataria first tackled this issue when we first had two quarters in a row of decline – 4Q14 and 1Q15. The panic was palpable among economists, but hardly registered in popular media. It’s far too technical to explain easily, after all, and there’s no need to devote a lot of space to actually explaining something.
Productivity is nothing more than the total value of all goods and services divided by the total number of hours worked. It’s important to keep that in mind. It’s a bulk measurement.
When the drop was first shown in 2015, we noted three reasons why productivity had slowed down. The first one was good news, which is that hiring has indeed gotten ahead of economic growth and businesses are investing in employees. The second was that investment in capital has been weak, meaning that all these new employees are less automated than they have been in the past. Lastly, and most importantly, GDP growth is down for a lot of reasons – especially the price of commodities like oil where there is a lot of automation and very few actual employees.
The article stands by itself because these trends are still in place. Businesses are sitting on cash, still, and are afraid to re-invest in capital equipment for the long haul. This remains the biggest barrier to a sustained expansion. It’s also a function of the pessimism that runs rampant throughout the culture at this time.
Barataria has predicted that this will start turning around next year. We have every reason to believe that productivity will stagnate or decline until then.
It’s worth noting that this has hit the popular press now that someone has figured out to explain this complicated issue. Of course, the explanation is not just wrong but silly, but we can expect it to take hold through the end of the year. More and more, articles are blaming the use of smartphones at work, especially among young people, as the reason for the decline.
Why is this silly? It presumes that this generation slacks off more than the previous at work, given that they have toys that let them get away with it more easily. While the methods of slacking off may have changed there is no evidence to suggest the volume has increased.
That’s unlikely to stop the cranky guy who reads Breitbart from repeating this story to you at work, naturally. But it’s not like he’s slacking off as he tells you all about it, right?
So what is causing this productivity slide? As always, it’s a response to the incredible rise In productivity maintained by having workers were being shed in the early part of the Managed Depression. This chart shows how productivity is simply reverting to the mean after a solid six years of totally unsustainable growth:
Overall, there is no reason to believe that this period won’t have a net result much more like the low rate of growth seen from 1973-1979. And there is no reason to believe that this should pick up until there is more investment in the capital necessary to produce more economic growth, the top line of the productivity equation.
The scapegoating of smartphones and Millenials in the popular press means that the productivity story is running its natural course. The way things work this will become a popular mantra, especially among cranky old people, about the time productivity starts rising again. That doesn’t have to be true, but it usually works out this way.
Is it time to panic yet? No, but it’s long past time to invest. Discussing how that might happen would be a far more useful story than telling us how awful those young people are. But it also would mean telling the world that things aren’t actually full of gloom and/or doom – up to and now including how how lazy today’s kids are.
I can’t help but suspect that so much money is being sat upon because the people controlling it are waiting for the TPP, etc, to kick in. If people really thought that was dead, would domestic manufacturing investment increase?
I still think that trade deals really don’t influence anything but the margins. There is definitely a general belief that there isn’t anything good to invest in at this time, which is terrible for the economy. It’s the one thing holding us back, and it seems to be a matter of faith more than anything else.
I can’t believe how stupid everything gets. Is this really where the debate about productivity is going? I think you may be wrong that there is more to it than this & it is a problem if this continues. It would mean that job growth would slow, wouldn’t it?
Eventually job growth will slow, yes, but for now we are doing well. This is an example of how dumb it gets, yes.
Good blog. Isn’t the low price of oil part of the problem for productivity or has that been low for so long it’s factored out?
Year over year, oil is if anything up. So that effect has been accounted for. Thanks!
Well. We don’t need more stuff, though returning more manufacturing of it to the US and Canada would be economically beneficial. But the real investment needed is in infrastructure, responses to climate change, health care and nutrition, education …. all mostly in the category of “public” investment. Thus, what we need, as I see it, is “tax and spend,” and this seems to be politically/ideologically difficult regardless of how obvious the need. Another way to put this is that we need to confiscate a lot of the unused, unproductive wealth by means of wealth taxes, and then spend it through public political processes. (Yeah, peeps, go ahead and rave…..)
Yes, absolutely! And the bond market is behind this with so much money going to T-Bills in search of a “safe haven”. We have a 30yr bond rate of 2.25% and a growth in GDP of over 3% (no inflation) – that’s basically free money by any measure. We have no excuse for not doing what the bond market says we should be doing – infrastructure. It’s desperately needed, as are pushes for clean energy (via a prize system?) and so on.
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