Today’s release of “impressive”
second quarter “productivity” gains and weekly unemployment claims,
which have again surpassed the 400,000 level, provides a good opportunity to
introduce some clarity to a highly misunderstood subject.
I have already written why “strong”
productivity numbers are highly suspect as the lion’s share of the gains have
been concentrated in the manufacturing of computers. While it may be true that
the computer I am using to type this note is twice as fast as the one I used
three years ago, I am hardly able to produce the document in half the time.
When it comes to productivity it is not how efficiently an economy produces
its tools, but how much more efficiently its tools enable it to produce consumer
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While a small portion of the productivity gains are in fact real, their positive
impact on economic growth will be minimal. In the past, a business increased
productivity by substituting capital for labor. More capital allows the same
number of workers to produce a greater output of widgets, increasing profitability
and freeing up labor for other pursuits. Society benefits as labor-saving devices
increase aggregate savings, financing increased capital investment that creates
new employment opportunities. Capital investments themselves also create profits
for the American companies producing the equipment, further increasing savings
and creating additional employment opportunities.
Today, however, a company increases
productivity by simply replacing domestic labor with less expensive foreign
labor. The savings for America therefore are greatly reduced as the added “productivity”
comes at the expense of a growing current account deficit. Instead of increased
aggregate savings, these gains simply burden the economy with increased aggregated
indebtedness. Growing international interest payments deprive the economy of
capital needed to finance growth and create additional employment opportunities
to replace the lost jobs.
So, while analysts and journalists
continue praising misleading “productivity” numbers, the American
economy will continue to produce less, and the number of unemployed Americans
will continue to grow.