** the productivity miracle **

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    Benson's Economic & Market Trends

    The Productivity Miracle and Other Myths and Fairy Tales

    March 25, 2004

    Lately, so much has been made of the New Economy and the "miracle" of high productivity growth as a reason why inflation has remained so low. During this time, the Fed has run the easiest monetary policy since a Latin American country kicked off hyperinflation. Moreover, the talking heads on "CNN Bubble Vision" have become instant classical economic luminaries in their own shallow minds, fawning at the Fed Chairman and proclaiming his genius that the low rate of job growth is caused by this miracle.

    We agree there is a connection between high productivity and the lack of job growth, but we also notice the destructive trends that are the root cause of high productivity. We are led to assume that new capital invested in American factories is so productive that we can have more productivity without additional labor. However, while superior capital investment does increase labor efficiency, the factors being measured in America have nothing to do with this cause of productivity. In this country, we could certainly have a policy guaranteeing that 70 percent to 80 percent of manufactured goods consumed in America are actually made in America. Such a policy would add over 6 million manufacturing jobs in the United States and another 10 million service jobs that support the high paying manufacturing jobs.

    Sadly, the real causes of the productivity miracle are "purposely hidden in plain sight" while the Chairman of the Federal Reserve tells us to look the other way, and believe in fairy tales.

    We noticed the first indication of something going horribly wrong when Greenspan went to Capitol Hill for his annual testimony. On the first day, he went to the Senate and praised productivity growth. On the next day, he immediately went back to tell the House that retired workers on social security should not only not share in this productivity miracle, but they should work longer and harder and receive less benefits! Surely, we should have expected that he would be urging Congress to increase, not decrease, the benefits to those receiving a pension!

    In looking at the world as it really is (and not what our government and Fed officials would like us to believe it is), at least two-thirds of productivity growth comes from the convenient ways that productivity is actually measured.

    The first big con is measuring the investment in computer-type equipment. Because computers are running faster, the Bureau of Labor Statistics, "BLS", claims their prices, and that of other technology related goods, have fallen. In addition, because we have bought so much more in the way of technology, such as computers and cell phones, this factor not only pulls down the CPI and Price Deflator in the GDP, but it accounts for a large fraction of growth in the GDP. While the same amount of dollars are being spent on things like computers, the price for the same amount of computing power, speed and disk storage, is dropping like a stone. Pushing inflation down, by definition, forces production up which moves productivity upward.

    True. My computer now handles many tasks much faster than, say, five years ago. However, all this new "productivity" assumed out of thin air because the computer is faster is clearly a myth, not a reality. Indeed, while the internet and using a computer has allowed for an incredible improvement in one's ability to perform their job and get work done expeditiously, the average user spends an inordinate amount of time deleting spam and answering needless emails. This productivity drain does not get factored into the CPI, or the GDP. Moreover, we find ourselves as unpaid employees of the airlines, hotels, and other businesses we do commerce with, since we now do the work that their paid clerks used to do. Those companies now require fewer workers because we provide the labor to order their products, so we are technically working for them for free. The productivity vanishes if hedonics and the miss-measured price indexes are taken into account.

    Productivity is measured by the product that leaves the factory in the United States, divided by the number of workers. No common sense adjustment is made for the sad fact that now the United States only produces 45% of the manufactured goods it consumes. Also, a startling percentage of workers, classified as manufacturing workers, are not engaged in manufacturing at all but in the design, marketing, back-office, shipping and logistics of these companies. All too often, the manufactured product (or almost all of the component parts), arrive from Asia. All that is left for the American to do at this point is to assemble, put it in a box, ship, and bill. Take one look at our trade deficit with China and the rest of Asia and you'll realize the real manufacturing work is being done over there. No wonder Americans look productive. It doesn't take too many people to put the finished goods in a box and ship them out!

    To fully understand the "Productivity Fraud", take a moment to notice that worker productivity is measured as Output vs. Unit Labor Cost. Sending jobs to Asia is a great way to cut Unit Labor Cost by 80 to 90 percent! Another way to cut Unit Labor Cost is to cut health care benefits for retired workers. Even better is forcing labor agreements that allow new workers to get paid one-half of what established workers receive.

    In the world of "white collar jobs" the usual tactic is to inform the work force that half of the jobs have been eliminated. This changes the definition of the remaining job(s), and creates one job that used to be performed by two people.

    You also have to love the stories about Wal-Mart, the self-proclaimed and largest private employer in the United States, and how they repeatedly avoid paying their employees their full earned wages. In particular, I recall reading a story about staff that were forced to work off-the-clock and through lunch and rest breaks. They were also pressured to complete assignments while the store managers refused to permit them to stay on-the-clock for the full amount of time it took to accomplish their duties. A former employee stated "when he worked at Wal-Mart, the employees were routinely "locked in" after closing and were forced to remain there until the store managers visited every department.

    Where would American commerce be without those million plus "illegal workers" to pick crops, build homes, cook, clean, and wash up at the Indian owned motel chains? They work incredibly hard, can't complain in English, and are terrified of being sent "home". Sweating Asian labor to import inexpensive manufactured components, and abusing both legal and illegal workers here in America, is the real productivity miracle! If you gave these same hard working people health and social security benefits, not only would there be no productivity miracle, but social security would be "bust". When you realize what is really going on, you can then comprehend why jobs aren't growing and our wages and salaries are stagnant. American workers are getting the "short end of the stick".

    Our current policies of easy credit and tax-cut stimulation designed to favor consumption over production, creates a world where: America is the consumer; Asia is the producer. America is the debtor; Asia is the creditor. Asia is a builder of new factories; America is a country that keeps borrowing more against their houses to keep spending in an election year. We have mortgaged our future to pay for Japan's aging population, and we need to tell our old folk to go back to work to keep paying for their children's wild spending spree on credit cards, super-sized homes, and gas guzzling hummers.

    For years, the Democrats ruled by buying the public's votes and money. Indeed, such "spend, spend and elect, elect" tactics usually worked. However, even Fed officials realize that the level of trade and federal deficits and consumer debt are near a "tipping point", yet, they are searching for new arguments to persuade us that the debt levels are acceptable.

    You may wonder what President Bush's economic legacy might be? George Bush is on the verge of going down in history as the President who "left every American worker behind". If this kind of productivity continues, America will likely be headed into massive inflationary recession.

    Richard Benson
    Specialty Finance Group LLC
    Member NASD/SIPC

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