Peter Schiff
If the Economy were a car, productivity would be the engine. Heated
seats, on-demand 4-wheel drive and light-sensitive tinted windshields,
are all very nice. But they mean little if the engine doesn’t turn and
the car just sits in the driveway. The latest productivity data from the
Commerce Department confirms that our economic engine is sputtering.
If you strip away all the bells and whistles of economic analysis,
the simple truth is that the increased living standards that have taken
us from the stone age to the digital age happened because we increased
our productivity. Better plows, windmills, bulldozers, factories and,
more recently, better software, technology and automation, have allowed
economies to produce more output with less human effort. This means
there are more goods and services for more people to share and workers
can work less to acquire those goodies. When productivity stops
increasing, no amount of financial gimmickry can compensate.
With this in mind the latest batch of productivity data should have
significantly changed the conversation. But like other pieces of
evidence that point to a weakening economy, the news made scarcely a
ripple. The fact that few opinions about our economic health changed as a
result, confirms just how big our blinders have become.
Most of the economic prognosticators were fairly confident about
the Second Quarter numbers. After all, productivity had unexpectedly
declined for the prior two quarters, and given the optimism that is
ingrained on Wall Street and Washington, a big snap back was expected.
The consensus was for an increase of .5%. Instead we got a .5%
contraction. That’s a huge miss. The contraction resulted in three
consecutive declines, something that hasn’t happened since the late
1970’s, an era often referred to as the “Malaise Days” of the Carter
presidency. That time, which spawned such concepts as “stagflation” and
“the misery index,” was widely regarded as one of the low points of U.S.
economic history. Well, break out your roller disco skates, everything
old is new again.
But it gets worse. Productivity declined by .4% from a year
earlier, marking the first annual decline in three years. According to
data from the Bureau of Labor Statistics, the total magnitude of the
three quarter drop was the largest decline in productivity since 1993.
The last three quarters mark a significant decline from the already
abysmal productivity growth we have since the Financial Crisis of 2008.
According to the Wall Street Journal, during the 8 years between 2007
and 2015 productivity growth averaged just 1.3% annually, which was less
than half the pace that was seen in the seven year period between 2000
and 2007.
The talking heads on TV can’t seem to offer any real reason why
productivity has gone missing. Some feebly suggest that globalization is
the problem, or that automation has moved so fast that the benefits
usually offered by technological improvements have lost their power.
But it would be hard to come up with a reason why trade, which has
universally benefited local, regional, and international economies
through comparative advantage and specialization, has suddenly become a
problem. Similarly, when does greater efficiency become a problem rather
than a solution? So they are stumped.
But these economists ignore the major change that has befallen the
world over the last eight years, a change that has coincided neatly with
the global collapse in productivity. The Financial Crisis of 2008
ushered in an age of central bank activism the likes of which we have
never before seen. All the worlds’ leading central banks, most notably
the Federal Reserve in Washington, have unleashed ever bolder
experiments in monetary stimulus designed to reflate financial markets,
push up asset prices, stimulate demand, and create economic growth. And
while there is little evidence that these policies have produced any of
the promised benefits, there is every reason to believe that the scale
of these experiments will just get larger if the global economy doesn’t
improve.
But very few brain cells have been expended about the unintended
consequences that these policies may be creating. But let’s be clear,
there is nothing natural or logical about a set of policies that result
in an “investor” paying a borrower for the privilege of lending them
money. So in this strange new world, we should expect some collateral
damage. Productivity is a primary casualty. Here’s why.
Another set of statistics that has accompanied the decline in
productivity is the severe multi-year drop in business investment and
spending. Traditionally, businesses have set aside good chunks of their
profits to invest in new plant and equipment, research and development,
worker training, and other investments that could lead to the
breakthroughs and better business practices. The investments can lead to
greater productivity.
But the business investment numbers have been dismal. But it’s not
because corporate profits are down. They aren’t. Companies have the
cash, they just aren’t using it to invest in the future. Instead they
are following the money provided by the central banks.
Ultra low interest rates have encouraged businesses to borrow money
to spend on share buybacks, debt refinancing, and dividends. They have
also encouraged financial speculation in the stock market, the bond
market, and in real estate. Investors may believe that central bankers
will not allow any of those markets to fall as such declines could tip
the already teetering global economies into recession. The Fed, the Bank
of England, the Bank of Japan, and the European Central Bank have
already telegraphed that they will be the lenders and buyers of last
resort. These commitments have turned many investments into “no lose”
propositions. Why take a chance on R&D when you can buy a risk free
bond?
Higher interest rates are actually healthy for an economy. They
encourage real savings, with lenders actually concerned about the safety
of their loans. Without the backstop of central banks, speculators
could not out bid legitimate borrowers who make capital investments that
produce real returns. But with central banks conjuring cheap credit out
of thin air, supplanting the normal market-based credit allocation
process; the result is speculative asset bubbles, decreasing
productivity, anemic growth, and falling real wages. Welcome to the new
normal.
If the cost of money is high, people think carefully about where
they want to put their money. They select only the best investments.
This helps everyone. When money is cheap, they throw darts against a
wall. This is not the best use of societies' scarce resources. Is it any
wonder productivity is down?
Many economists are now saying that the Fed won’t be able to raise
rates until productivity improves. But productivity will never improve
as long as rates stay this low. This is the paradox of the of the new
economy.
When will central bankers conclude that it’s their own medicine
that is actually making the economy sick? They will not make that
connection until they succeed in killing the patient…and even then they
may continue to administer the same toxic medicine to a corpse. The
political pressure is just too great to ever admit their mistakes, so
they repeat them indefinitely.
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