Fear the Low-Productivity Economy of the Future

Economic health is a tricky thing to measure, especially in the short term. Monthly numbers are often revised, quarterly forecasts are ruined by unpredictable events, countless subtle metrics must be considered, and the desirable optimum state of the economy is difficult to express in simple terms.

In fact, one of the worst things about politicized economics is the false promise that politicians know what the ideal economy looks like, never mind having solid plans for getting there. Is the ideal economy one in which everyone’s basic needs are covered? Welcome to the endless grey fog of the collectivist welfare or communist state, which always proves unsustainable and fails to deliver on those promises anyway. Is it an economy where everyone works?

We could have that with hardcore fascism, indentured servitude, or various other authoritarian horrors, none of which is any sane person’s vision for the prosperous future of a free nation. How about an economy where the gap between rich and poor is smaller and more “equal?” Making everyone poor is the fastest, most dependable way to arrange that.

And we’re already well into our latest painful lesson in how prosperity cannot be imposed by political fiat, through such measures as raising the mandatory minimum wage, as jobs disappear and robots begin taking over the entry-level jobs socialism has annihilated… yes, including food service. Why does every generation forget this lesson and curse its children to learn about supply and demand in the worst possible way?

The never-ending quest to find a bit of good news peeping through the Obama malaise keeps turning up short-term positive indicators which generate a few good headlines, then vanish in a cloud of “unexpected” downturns and revised reports, as the media spends every sprint pretending to be surprised that winter is cold. The latest bit of guarded optimism concerns a 3.3% rise in short-term productivity, the output of goods and services per hour worked. The second quarter saw the best bump since the end of 2013, “reflecting a bounce back in economic activity following a slow start to 2015,” in the estimation of the Wall Street Journal.

Gross Domestic Product perked up as well, jumping from the first quarter’s horrifying flatline of 0.6% growth to 3.7%.  It was clear enough that the U.S. economy had not ground to a complete halt, but it’s equally silly to over-emphasize one good quarter. Put them together and you get the same old two-point-something growth we’ve been stuck at throughout this weak “recovery.”

James Pethokoukis at the American Enterprise Institute notes that “longer-term productivity growth remains terribly worrisome,” citing analysts who believe productivity is the most reliable measure of economic success, and right now the long-term trend suggests a future of modest growth and flat personal income.

“If productivity growth stays this slow and you assume 1% labor force growth, then America’s potential growth rate isn’t even 2%. The pie may double only every half century. While Democrats are focusing on their demand-side, consumer-oriented ‘middle out’ economics, the US economy may well face serious supply-side issues,” Pethokoukis writes.

I’m not sure why we’d assume even 1% labor force growth in a workforce that has lately displayed a nasty tendency to shrink, even as the population grows, but his point is well-taken. A shrunken workforce with a small number of people using advanced technology to generate high individual output would have a very high “productivity” factor indeed, but that’s not what most citizens of the United States want. It would have a certain appeal to employers, of course, especially since the fixed cost of each individual employee is so high. Reducing the number of human beings required to keep an enterprise humming along, as the remaining employees become productive beyond the dreams of our grandparents, makes business sense, but it’s not necessarily socially desirable.

“Aha! That’s what Barack Obama was trying to say when he blamed his lousy economy on job-killing automated teller machines!” you might cry. No, he was objectively wrong about that, both in general and in the specific case of ATMs. One further condition is necessary to make the “automation kills jobs” nightmare work: a stagnant economy in which business formation, private-sector investment, and entry-level hiring are difficult. There is no absolute, inescapable reason why high productivity and plentiful automation should result in agonizing levels of unemployment and millions of “surplus people” doomed to lives of dependency.

Productivity can, and should, create investment and employment opportunities. As in the example of ATMs, where banks found better uses for their tellers instead of firing them, human capital remains valuable no matter how sophisticated machines become. The name of the game is to discover that value and make it profitable. That which is profitable will always be purchased. Productive labor is profitable. Give capitalists a way to make money from it, and they’ll buy all of it they can get… in turn creating new opportunities to meet the needs of productive employees with money in their pockets. It’s not an instantaneous, magical, or painless process, but it works, until politicians sabotage it.

On the other hand, high productivity plus limited opportunity, a declining workforce, and a generous welfare state results in a smaller number of employable people fighting for work in a buyer’s market for labor, a picture made even grimmer by importing cheap labor to price Americans out of that market. It becomes less necessary for employers to reward the highly productive with excellent wages if there are loads of highly productive people – or people made incredibly productive with advanced technology – desperately looking for work. This is especially true at the entry level, where expensive but potentially unreliable humans can be replaced entirely by machines.

Politicized economics should be distrusted because those who demand control over these complex systems so clearly fail to understand how they work. The can’t even clearly articulate what the successful outcome of their policies would look like. (In many cases, that’s because they are profoundly dishonest about what they hope to achieve, as the true objective is hoarding more power and money for the political class.) It should be easy to agree that a system in which high individual productivity is feared isn’t working… as is a system in which such productivity is actively fought by socialist policies… or a system in which productivity is concealed, through such means as claiming that high levels of government spending on education automatically produces a more productive workforce.

As Milton Friedman said for the ages, when told it was better to dig with shovels than bulldozers because more people would have jobs that way: “Why not use spoons?” An economy in which bulldozers are feared, or spoons are confused with bulldozers, makes no sense.