A U.S. Productivity Puzzle (Demo)

By Gary Reber Uncategorized October 5, 2015

Leroy and Lauri Dixon, the husband and wife owners of Party Plus, a tents and event rentals company, stand in their warehouse in Glen Burnie, Md., on Sept. 17. (Kenneth K. Lam / Baltimore Sun)

On October 5, 2015, Don Lee writes in the Los Angeles Times:

Leroy and Lauri Dixon used to plow $40,000 a year into promoting their party-supply business in a dozen telephone books. Today they spend $4,000 less and reach a lot more people by advertising on Google, Yahoo and Bing.Also gone are the house calls to potential customers; the Dixons and their staff of 15 at Party Plus Tents and Events now get leads through Facebook, Instagram and other social media.

Technology has changed the back office too. Leroy Dixon deposits checks from his desk with a scanner. Specialized software allows the firm to track every canopy and chandelier it owns, while also emailing purchase contracts instantly to clients. Deliveries are more reliable now that company drivers have GPS devices.

And yet, sales this year at Party Plus won’t quite reach the $2 million hit in 2007, when the Baltimore-area business wasn’t using most of these time- and money-saving systems, and had two fewer employees.

That’s partly because of the slow recovery, but the Dixons’ inability to boost their company’s efficiency despite the new technology reflects a phenomenon that’s afflicted the broader American economy: Despite impressive innovations, new gadgets and applications that have transformed the way people do business and consume goods and services, the nation’s productivity gains have been disappointingly paltry over the last decade.

Economists call this the productivity puzzle, and it has sparked sharp debate between those who see the trend as more or less permanent and others who are more optimistic about America’s future, believing that the stagnant performance is really a measurement problem or that an acceleration in productivity is around the corner.

Raising productivity — or output per work hour — is the key to lifting wages and living standards. Sluggish productivity growth helps explain the long-stagnating incomes of most Americans. It’s also partly behind many analysts’ projections for mediocre economic growth and expectations that the Federal Reserve will keep interest rates below historical levels for years to come.

“The U.S. productivity slump is the No. 1 economic problem,” said Paul Ashworth, chief U.S. economist for Capital Economics, a research firm.

America had a golden age of productivity from 1948 to about 1973. During that quarter of a century, U.S. productivity on average rose at a robust rate of about 3% a year, thanks to a wide array of technological advances and innovations, some rooted in wartime activities. These included the development of the transistor and semiconductor; new polymers and synthetics that boosted production of chemicals and medicines; the completion of the interstate highway system and major improvements in air and rail transportation.

But since then, except for a relatively short period between 1996 and 2004, productivity in the U.S. has grown by just half that pace a year, on average. The difference is huge: Annual productivity increases averaging 3% mean the U.S. standard of living would double in 24 years. At 1.5% growth a year, it would take 47 years.

Some of the low gains in recent years may stem from the Great Recession. The severe economic downturn led to a credit crunch, hampering start-ups and innovations. Many firms also cut back on spending for new equipment and software, as well as for worker training — all factors affecting output and efficiency.

But the productivity slowdown began well before the Great Recession in 2008 and 2009, according to John Fernald, an economist at the Federal Reserve Bank of San Francisco and a leading expert on the subject. Fernald research’s found that the falloff in productivity was concentrated in producers of information technology and those industries that make heavy use of it, including telecommunications and wholesale trade.

What that suggests, he said, is that while the digital revolution brought sweeping changes in the way wholesalers, for example, manage supplies and organize their operations, the big gains in output petered out after a few years.

“By the mid-2000s, the low-hanging fruit of IT-based innovation had been plucked,” he said.

Leroy Dixon’s experience generally lines up with this pattern. The 54-year-old started Party Plus in 1994 with one full-time employee and two part-timers. He remembers how much business improved in those early years, after the couple was able to computerize orders and inventory and expense management. “What it allowed us to do was to take on more work and grow the business,” he said.

But in more recent years, the Dixons have found it harder to wring productivity improvements even with the massive computing power they now possess in their laptops and iPhones. And they’ve learned that harnessing new technologies also brings new challenges.

For example, one of Party Plus’ fastest-growing services is setting up wedding parties, thanks largely to Instagram, where people can flip through photos of the company’s reception decor and table settings. But there’s a catch: Customers booking on the Internet are requesting increasingly shorter lead times, which makes it harder for the Dixons to plan ahead and prepare the supplies and labor needed for each job.

“Some of the changes that at the same time seemed to make you more productive actually cut from it,” Leroy Dixon said. He noted that it took Lauri about a year to work out the kinks in new software the company bought for $40,000 in 2008 — and it’s not much better than the earlier-generation program. Then there’s today’s workforce, which the Dixons, like many small business owners, say needs to be better trained and more committed before America’s productivity can return to its glory days.

“It’s probably going to take time, but the productivity increases will come,” he said.

Robert Gordon, an economics professor at Northwestern University, has a more pessimistic view of things. He argues that the development of the computer and Internet over the last few decades hasn’t been the kind of game-changer seen during America’s two industrial revolutions in prior centuries — the first powered by the steam engine and cotton gin, and the second by electricity, the internal combustion engine and indoor plumbing. Meanwhile, today’s rising economic inequality and large private and public debts are tamping down growth in the economy and productivity, he said.

But there are also reasons to be more hopeful. The percentage of adults with four or more years of college has continued to tick higher over the last decade. Despite federal budget cuts, U.S. total spending on research and development has rebounded in the last three years. And a wave of innovations and technological advances — machine learning, driverless cars, nanotechnology, 3-D manufacturing, to name a few — offer promise of significant productivity-enhancing changes in the years to come.

Some economists suspect the problem lies in measurement, and that perhaps productivity is improving in ways that are simply not being reflected in the statistics. The value of social media and the digital economy in general aren’t captured well in output measures that are based on a decades-old economy driven by manufacturing.

Even so, most analysts doubt that better measuring tools would dramatically change the overall story line of sluggish productivity.

Future productivity will depend on what happens with new-business formation, government spending for infrastructure and business investment in machinery and software, all of which have been relatively weak in recent years.

“Labor has been so cheap that businesses didn’t have incentive to invest in labor-saving technologies,” said Mark Zandi, chief economist at Moody’s Analytics.

There are signs that’s starting to change.

A little more than two years ago, Iddo Benzeevi’s firm, Highland Fairview, built and installed advanced warehouse equipment at a 1.8 million-square-foot Skechers facility in Moreno Valley, Calif. Previously, the shoe company had 1,100 year-round distribution workers who, driving down aisles with forklifts, picked up and stacked 7,000 boxes an hour. Today, dozens of robotic cranes in the new Skechers warehouse make it possible to move triple the number of products with 400 fewer workers.

Benzeevi said he thinks it’s only a matter of time before more companies make such investments — and that when that happens, what had been trickles of improvements in productivity will turn into bursts of growth.

“It’s all coming together, but not in one day,” he said, noting that before e-commerce took off, people had to wait for the Internet to spread, for greater bandwidth, for secure websites, for software for banks and merchants to handle transactions. “You need to have all the incremental gains first.”

One of the advances that Benzeevi thinks could be transforming for his industry are driverless, or autonomous, trucks, the first of which have been approved in Nevada. “Or maybe, there’ll be Uber for distribution, to transport goods,” he said, referring to smartphone riding-sharing app.

“It’s not always predictable,” he said.

http://www.latimes.com/business/la-fi-economy-low-productivity-20151002-story.html

This article is written from the standpoint of a one-factor thinker. Los Angeles Times business writer Don Lee appears to be the one who continues to be puzzled. Anyone with any ability to reason should deduce from the beginnings of mankind, picking up the first stick or stone, that most changes in the productive capacity of the world since the beginning of time can be attributed to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. People invented “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive––the core function of technological invention and innovation.

Technology is about reducing the necessity for human input, particularly human toil and enabling otherwise impossible production, all the while increasing efficiency of production at lower costs. The reason the economy is stalled, despite the never-before-seen extent of technological prowess, is not because technology is failing us, but instead because there is not enough “customers with money” necessary for creating demand for products and services. To expect that as technological invention and innovation excels that the human input should earn more as labor workers assumes wrongly that non-human capital “enhances” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. The result of technological invention and innovation has created tectonic shifts in the technologies of production, which is rapidly spreading throughout the world, destroying jobs and devaluing the worth of labor as more and more people must compete for fewer and fewer decent paying jobs. Wages have been slashed in many areas and in other cases entire industries have been outsourced to countries where corporations can pay workers pennies on the dollar.

What Don Lee or any body of economists fail to address is that productive capital is increasingly the source of the world’s economic growth and, therefore, should become the source of added property ownership incomes for all. But because the ownership of productive capital assets are vastly concentrated among a tiny minority of wealthy people, the vast majority of Americans are finding it increasingly more challenging to earn decent wages from a job to be able to afford the products and services they need and desire.

Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power––and relatively constant). The technology industry is always changing, evolving and innovating. The result is that primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.

Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on equal opportunity to produce, full production and broader capital ownership accumulation. This is manifested in the myth that labor work is the ONLY way to participate in production and earn income, and that individual talent and effort are what distinguish the wealthy from the non-wealthy. Long ago that was once true because labor provided 95 percent of the input into the production of products and services. But today that is not true. Physical capital provides not less than 90 to 95 percent of the input. Full employment as the means to distribute income is not achievable. When the “tools” of capital owners replace labor workers (non-capital owners) as the principal suppliers of products and services, labor employment alone becomes inadequate. Thus, we are left with government policies that redistribute income in one form or another.

If we postulate that if both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then logically equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all. Yet, sadly, the American people and its leaders still pretend to believe that labor is becoming more productive, and ignore the necessity to broaden personal ownership of wealth-creating, income-producing capital assets simultaneously with the growth of the American economy.

To put this in context, it is important to briefly note that throughout history, man has endeavored to overpower the time constraints of physical and biological processes. It is now an accepted fact that accelerated scientific and technological innovation has directly led to a speeding up of all physical and social processes in the name of progress. The competitive drive has led to a frantic national and international chase for more efficient methods of production and distribution. In the process, humanity has pushed to develop even more powerful technologies, on the assumption that such technologies would accomplish more and more useful functions in less time. The results have been a dramatic acceleration of change and concentration of wealth ownership.

The solution is to create a democratic growth economy, wherein the ownership of productive capital assets would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate wealth. Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, benefiting EVERY citizen, including the traditionally disenfranchised poor and working and middle class. Thus, productive capital income, from full earnings dividend payouts, would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth and more profitable enterprise. That also means that society can profitably employ unused productive capacity and invest in more productive capacity and green technologies to service the demands of a growth economy. As a result, our business corporations would be enabled to operate more efficiency and competitively, while broadening wealth-creating ownership participation, creating new capitalists and “customers with money” to support the products and services being produced.

“Hoggism,” today’s capitalism, is about the ability of greedy rich people to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to earn the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

A U.S. Productivity Puzzle (Demo)

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