Category: productivity

Productivity & GDP

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March 23rd, 2014

Industrial Production

The week opened with a positive report on industrial production.  The .8% rise offset Janary’s decline and was the 4th month in which this index has been above the level of late 2007, the onset of the last recession.  To give the reader a sense of historical perspective, this index of industrial production has been produced for almost hundred years.  The average recovery period of civilian production is 2-1/2 years.  This recovery period of this past recession, 6 years, is second only to the  7-1/2 year recovery of the 1930s Depression.  I have excluded the 6-1/2 year post WW2 recovery period from war time production, which doubled production to produce goods and armaments for the war.  If that period is included, the average is 3 years.

Here is a comparison of the recovery periods since 1919.  The back to back dips of 1979 and 1980-83 were, in effect, one long dip lasting 4 years, making it the third worst recovery period of the past one hundred years.

When industrial production takes several years to regain the ground lost during a recession, it is vulnerable to even minor economic weaknesses.  As production recovered from a 7-1/2 year dip during the 1930s Depression, the Federal Reserve tightened money and production slid once again before reviving to produce arms to ship to British and European forces in the early years of World War 2.  Outgoing Federal Reserve chairman Ben Bernanke, a noted scholar of the 1930s Depression, understands the inherent weakness of an economy when production takes several years to recover.  For this reason, he was reluctant to ease up on monetary support until production was clearly and securely recovered.

The new Federal Reserve chairwoman, Janet Yellen, has decades of experience and is well aware of the fragility that is inherent in an economy that experiences a long period of industrial recovery.  This will be one of several factors that the Federal Reserve watches closely for any signs of faltering.  Those who think that the Fed will make any abrupt changes in monetary policy have not been reading the footprints left by the past.

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Productivity

Last August I wrote about the rather slow growth of multi-factorial productivity (MFP) since 2000.  The Bureau of Labor Statistics (BLS) calculates a meager 1% annual rate of growth in that time.  Far down in their historical tables is a revealing trend: Labor’s contribution to production has declined dramatically in the past ten years while capital’s share of inputs has increased.  Capital inputs include equipment, inventories, land and buildings.  In 2011, the most recent year available, labor’s share of input had decreased to 63.9%, far below the 60 year average of 68.1%.

Capital’s share of input had increased to 36.1%, far above the average 31.9%

As I mentioned last August, the headline productivity figures are misleading because they simply divide output by number of hours worked and ignore the contributions of capital to the final output.  As capital’s share of input increases, the contributors of that capital want more return, i.e. profit, on their increased contribution.

In the twelve years from 2000 – 2011, capital’s share of input has increased 20%, from 30% to 36%.  In that same period, after tax profits have grown by 130%, a whopping return on the additional 20% capital invested.  While overall MFP growth has slowed, the mix has changed.

Given such a rich return, we can expect this trend to continue until the growth of profits on ever larger capital investments reaches a plateau and slows.  Until then, labor’s share of productivity gains will be slight, acting as a continuing restraint on family incomes.

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Existing Home Sales

The 5 million sales of existing homes in 2013 was 9% above 2012 levels but the percentage of cash buyers has increased as well, now making up almost 1/3 of existing homes sales. (National Assn of Realtors).  The percentage of first time buyers declined from 30% in December 2012 to 27% in December 2013. For the past half year sales of existing homes have declined and the latest figures for February show a 7% decline from 2013 levels.

In May 2013, the price of Home Depot’s stock hit $80, a 400% rise from the doldrums of the spring of 2009.  Since then, it has traded in a close range around that price.  In May 2013, the price of the stock was 200% of the 4 year average, an indication that all of the optimism had been baked into the stock price.  It now trades at 160% of the 4 year average, rich but more reasonable if expectations for a continued housing recovery materialize.

In January 2000, the stock broke above $50 and was also trading at almost 250% of it’s 4 year average.  After trading in a range in the high $40s for several months, the stock began to fall.  By mid-June of 2000, the stock traded for 150% of its 4 year average.

The range bound price of Home Depot’s stock price for 8 months now is a good indication that investors have become watchful of the real estate sector, particularly the existing home market.  The percentage of cash buyers has risen 10%, replacing the similar decline in the number of first time home buyers.  Remember that this stalling is taking place at a time when interest rates are near historic lows.

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Reader questions

A reader posed a few questions about last weeks blog.

When annualized sales rates are down, but annualized inventory rates are up, is that usually because of prior contracts that businesses must accept?  Or is it usually hope for their future?  In other words, is a higher inventory rate a positive sign or a negative one?

When sales are going down and inventories are going up, it means that businesses were not prepared for the change in sales. This ratio measures the amount of surprise.  Businesses will then reduce their orders to factories, wholesalers, etc.  They may decide to reduce any hiring plans.  On the other hand, they might increase their marketing expense.  Look closely at the Inventory to Sales Ratio (ISRATIO) graph from the Fed.  In the early part of the recession in the first quarter of 2008, the ISRATIO moved up a bit, then down in the 2nd quarter but it was still in the subdued normal range of 1.25 to 1.30 established since 2006.  During the summer of 2008, the ISRATIO rose again but it was not until September 2008 that this ratio began it’s several month upward spike as sales crashed.

Re:  Decline in real personal consumption below 2.5% has ALWAYS led to a recession within a year.  Are there any substantive changes in how the economy is run now than in the past?  For example, has the Fed always been involved with quantitative easing like it is now?  Could that easing create a better economic climate despite personal consumption decline?  When we look at the past, are we generally comparing apples to apples?

The fact that a recession has always happened when inflation adjusted personal consumption falls below 2.5% does NOT mean that it will happen this time.  These are indicators, not predictors and we must remember that indicators of past trends are with revised data.  Investors and policy makers must make decisions with the currently available data, before it is fully complete. Personal consumption for 2013 could be revised higher in the coming quarters.  Some revisions happen as much as three years later.  What it does mean is that the Fed will be watching this sign of weakness in the consumer economy and is unlikely to make any dramatic policy changes.

So how do you think our leaders should lead in regards to SS?  Do you think the age should be raised to say 70?  Do you think we will not be able to depend on SS being there throughout our lifetimes?  It must be of great concern to your kids that it may not be there for them, esp. after having contributed over the years.

I think politicians will have to spread the pain on Social Security.  These suggestions are not new.

1) Raise the salary level that is subject to the tax so that more tax is captured from higher salaries.  This years maximum is $117K. (SSA) This is a tough sell.  The ratio of the maximum taxed earnings to the median household income (Census Bureau Table H.6) has gone up from 150% in 1980 to almost 220% in 2012.

Well to do people feel like they are already paying their “fair share.”  Senator Bernie Sanders and other Democrats use the ratio of the maximum taxed earnings to the top 10% of incomes to make the case that the maximum should be as high as $175K.  Computers and the availability of so much data enable policy makers and think tanks to produce whatever data set they want in order to support their conviction.

2)  Raise the employee and employer share of the tax .1% each year for the next five years.  Democrats will not like this one because it raises the burden on lower income families.

3)  Initially raise the social security age by two months each year over the next five years and index it to the growth in the life expectancy of a 65 year old so that the official retirement age is 15 years less than the life expectancy.  In 2025, if the life expectancy is 85 years, then the official retirement age would be 70.  Early retirement should be set at 3 years less than full retirement age.  In this case, early retirement would be 67.

All of these are tough choices and most politicians don’t want to touch them.   Voters are not noted for their prudence and are unlikely to pressure pressure policy makers for more taxes and less benefits. In order to sell these difficult proposals, I would add one more proposal.

4) Guarantee the payout of benefits for ten years, regardless of death.  Each retiree would name beneficiaries for their social security and payments would go to those beneficiaries until the 10 year anniversary that retirement benefits began.  This would incentivize retirees who could afford it to delay the start of their retirement benefits until 70, knowing that their heirs would get at least ten years of benefits. This delay would ease some of the fiscal shock as the boomer generation is now retiring.

Currently, the highest social security benefit is paid to a surviving spouse.  If a man dies with a higher monthly benefit than his wife, then the wife gets the husband’s higher benefit amount each month but loses her benefit.  Under this proposal, the wife would get her benefit and the husband’s benefit plus her benefit if her husband dies within ten years of retirement.  Often, a couple’s income is cut in half or by a third when a spouse dies.  Older women are particularly impacted, finding that they can no longer afford the mortgage or rent in their current housing situation. This feature would enhance the popular understanding that Social Security is like an insurance annuity.  It would help particularly vulnerable older surviving female spouses, an emotionally appealing feature that politicians could sell to voters, thus making it more likely that voters would accept the higher taxes and raised retirement age.  Whether the idea is fiscally sound is something that the Board of Trustees at the SSA could calculate.

Productivity

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August 25th, 2013

(First a little housekeeping: an anonymous reader commented that when they clicked the “back” button after viewing a larger sized graph they were returned to the beginning of the blog post instead of where they had left off when they clicked on the smaller image within the text.  I suggest that, after viewing a graph, try clicking the ‘X’ button on the top right of the graph page to return to where you left off.   This works in the Chrome browser.)

Since the onset of the recession in late 2007, I have read many articles on the lack of wage growth despite big gains in productivity.  Ideas become popular when they have a narrative, one that I took for granted.  Each quarter, the Bureau of Labor Statistics (BLS) issues a report on productivity and labor costs that I have taken at face value.

The 2001 manual of the OECD manual states “Productivity is commonly defined as a ratio of a volume measure of output to a volume measure of input use.”  They frankly admit that “while there is no disagreement on this general notion, a look at the productivity literature and its various applications reveals very quickly that there is neither a unique purpose for, nor a single measure of, productivity.” (Source)

The authors of a recent paper at the Economics Policy Institute cite BLS data showing that productivity has grown “by nearly 25 percent” in the period 2000 – 2012 while the median real, that is inflation adjusted, earnings for all workers has essentially remained flat.   Company profits are at all time highs and workers are struggling.  The narrative is familiar but I wondered: how does the BLS calculate productivity growth?

What the “headline” productivity numbers describe is labor productivity, the output in dollars divided by the number of hours worked.  The BLS Handbook of Methods, page 92, gives a detailed description of its methodology.  As the BLS notes, this often cited productivity figure disregards capital investments in output like machinery and buildings.  For this reason, the BLS also calculates a less publicized multifactor  productivity measure using methodologies which do incorporate capital spending.  How does capital investment influence the productivity of a worker?

Consider the simple case of a man – I’ll call him Sam – with a handsaw who can make 20 cuts in a 2×4 piece of lumber in an hour.  His company charges customers a $1 for each cut, the going rate, so that the company can sell Sam’s labor for $20 per hour. Due to increased demand for wood cutting, the company invests $1000 to buy an electric chop saw.  The company calculates that Sam’s productivity will rise enough that they can undercut their competition and charge 75 cents a cut.  With the chop saw, Sam can now make 60 cuts per hour at .75 per cut = $45 dollars in revenue per hour to the company.  Sam’s labor productivity has now risen 150%.  In our simple case, this would be the headline labor productivity gain – 150%.

A more complete measure of productivity including capital investments is quite complex.  The latest edition of the OECD handbook notes that “there is a central practical problem to capital measurement that raises many empirical issues – how to value stocks and flows of capital in the absence of (observable) economic transactions.”  To illustrate the point further, the asset subgroup listed in the BLS handbook includes “28 types of equipment, 22 types of nonresidential structures, 9 types of residential structures (owner-occupied housing is excluded), 3 types of inventories (by stage of processing), and land.”

You want simple?  Let’s go back to our kindergarten example.  At this rate of production, let’s say that the saw’s useful life is only 10 months.  The company has an investment of $100 per month in the saw, plus additional costs like electricity, a bigger workbench, etc.  To round out the numbers, let’s say that equipment related costs are $150 a month.  If Sam’s output is 8 hours a day x $45 an hour, Sam is producing $360 per day in revenue for the company, or close to $8000 a month. The $150 a month in equipment costs is trivial and multi-factor productivity is very close to labor productivity.

Sam knows he is making much more money from the company and goes to his boss and says he wants a raise.  Not only is he producing more for the company but the electric saw is much more dangerous than a handsaw.  The company gives Sam a raise from $7 an hour to $8 an hour, an almost 15% increase that Sam is happy with.  In addition to the raise, the company has an additional $2 in mandated labor costs, bringing the total costs for Sam’s labor to $10 an hour.  Even with the higher labor costs, the company is raking in huge profits – $35 an hour – from Sam’s labor.

But now an inspector comes in and tells the company that, because an electric saw makes much more dust than a handsaw, the company will have to install a ventilation and filtering system so that the employees and neighbors won’t have to breathe sawdust.  The company gets bids that average $100,000 to install this system and the company estimates that the system will equal $1000 a month in additional capital costs.  Despite the additional costs, the company still continues to make substantial profits from Sam’s labor.  To the company, the capital costs for this new system represents about 60% of an additional worker’s labor costs, yet that additional cost is largely not included in measuring labor productivity because Sam’s hours and the revenue generated by Sam’s labor remain the same.

A multifactor productivity comparison of handsaw vs. chopsaw production would show a percentage growth of 40%, far below the 150% labor productivity growth.

All of us have our biases (except my readers who are perfectly rational beings) which cause us to look no further than the narrative that clearly supports our previous conceptions.  If we generally agree with the narrative of companies taking advantage of workers, we read of 25% productivity gains for companies and 0% gains for workers in the past twelve years, and we look no further – for the data has confirmed what we previously had concluded.  Big companies = bastards; workers = victims.

In June 2013, the BLS released revisions to their productivity figures for 2012 and included historical productivity gains for various periods since 1987.  During the past 25 years, multifactorial productivity, including capital investment, has averaged .9% per year – less than 1%.

While labor productivity has grown 25% since 2000, multifactorial productivity has been half that, at about 12%.   Dragging the 25 year average down is a meager .5% growth rate since 2007.  Even more striking is the growth rate of input into that recent tepid productivity growth; the BLS calculates 0% net input growth since 2007.  For the past 25 years, capital investment has grown at more than 3% but since the recession capital growth has slowed to 1.3% per year.  I wrote last week that there is an underlying caution among business owners and this further confirms that caution; companies have been cutting back on both labor and capital investment.

If multifactorial productivity rose by 12+ percent over the past 12 years, and the profits did not go to workers, where did the money go?  For a part of the puzzle, let’s look to inflation adjusted dividends of the SP500.

From the beginning of 2000 through 2007, when the recession began, inflation adjusted dividends grew at an annual rate of almost 3.8%, eating up most of the profits from productivity growth.  As bond yields continued to decline, I would guess that investors pressured companies for more of a share of the profits from productivity growth.

As workers lost manufacturing jobs during the 2000s, many were able to switch to construction jobs in the overheating real estate market and unemployment stayed low.  This should have pressured management to give into labor demands for an increased share of the productivity growth but it didn’t.  I suspect that the labor mix contributed to the lack of pressure on management.  Fewer manufacturing jobs meant fewer union jobs; a reduced labor union influence meant less demand on management.

Looking past the headline labor productivity gains, overall productivity is slow.  Capital and labor investment is slow, which means that future overall productivity is likely to remain slow.

While walking a trail in the Colorado Rockies years ago, my brothers and I complained about having to dodge moose poop on the trail.  Then we ran into the bull moose that made the poop.

CPI and Wages

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Dec. 24th, 2012

Merry Christmas, Everyone!

This is part two of a look at the CPI, comparing the price index to wage growth.  Part 1 is here

In the years 1947-1980, the average hourly earnings of production workers rose 6.08% annually while the CPI grew 4.03% (Source)  In effect, earnings rose 2% higher than prices.   Since 1980, earnings have risen 3.55% annually as the CPI rose 3.29%, giving workers a real growth rate of less that a 1/3rd of 1%.

The rise in worker productivity fueled gains in worker compensation until the past fifteen years.  Below is a chart of real, that is inflation-adjusted, compensation and productivity.

Increased Productivity means more profits.  For several decades in the post-WW2 economy, workers shared in those profits.  After the recession of 1982-1984, workers’ share of the increase in output slowly decreased.  As incomes barely kept up with inflation, workers tapped the equity in their houses.

Low interest rates, poor underwriting standards, lax regulations and a feeding frenzy by both home buyers and banks fueled a binge in home prices, followed by the hangover that started in 2007.  Only now is the housing market struggling up out of a torpor that has lasted for several years.

Before the housing bust, magical thinking led many to believe that the rise in home equity was a sure fire way to riches.  Over a century’s worth of data shows that housing prices tend to rise about the same as the CPI.  Housing prices have finally bottomed out at about the same level as the long term trend line of CPI growth.

The boom and bust upended the lives of a lot of people and the repercussions of that “hump” will continue as banks continue to foreclose on home owners whose incomes have flattened or declined. The recovery in the housing market will help some home owners but the real problem is unemployment, underemployment and the decreasing share of workers’ share of the profits from productivity gains.  Until the labor market heals, the housing market will not fully heal.

Those who do have savings have become cautious.  Since 2006, investors have taken $572 billion out of stocks and put $767 billion in bonds, a move to safety – or so many retail investors think.  For decades, home prices never fell – until they did.  For over thirty years, bond prices have been rising, giving many retail investors the feeling that bonds are safe – until they are not.

Companies have been selling record amounts of corporate bonds into this cheap – for companies – bond market.  As this three decade long upward trend in bond prices begins to turn, bond prices can fall sharply as investors turn from bonds to stocks and other investments.  We are approaching the lows of interest yields on corporate bonds not seen since WW2.  Investors are loaning companies money at record low rates and companies are sucking up all that they can while they can.  Sounds a lot like home buying in the middle of the last decade, doesn’t it?

Y’all be careful out there, ya hear?

The BUT Economy

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December 9th

An eventful week in what I will call the BUT economy:  GDP revisions, Corporate Profits, Consumer Confidence and the Labor Report.  Let’s get into it!

At the end of last week, the Commerce Dept issued their customary revisions to 3rd quarter Gross Domestic Products (GDP).The first number that came out in October was a preliminary estimate.  As more data comes in, the Commerce Dept. revises its figures, and will have another revision in December.  From the initial estimate of 2.0% annualized growth, the Commerce Dept revised 3rd quarter GDP growth up to 2.7%, below the historical average of about 3% but good news is YAAY! Right?  Wait for it now…BUT upward revisions were due largely to companies building inventories.  Final sales actually declined from the initial estimate of 2.1% to 1.9%.  Excluding exports, final sales were revised from a growth of 2.3% to 1.7%.

The boom in natural gas production has led many power generators to convert their plants from coal to natural gas, when they can.  Total coal production is down this year (Source) but exports of U.S. coal to the rest of the world have surged, so that we are exporting a record 25% of the total coal production in this country.  The U.S. Energy Information Administration (EIA) estimates that coal exports will total about 133 million short tons this year, or 2-1/2 times the average of the past decade. (EIA Source)

The process of drilling for natural gas, called Fracking, has also led to a high production of crude oil (EIA source).

GDP includes both exports (+) and imports (-), what is called “net exports” and it has been negative for several decades as we import far more goods than we export.  This serves as a negative drag on GDP growth.

Exports have risen over the past decade.  As natural gas prices have fallen, surging coal exports in the past few years have helped buoy up lackluster GDP growth.

Another contributor to GDP growth has been a more confident consumer, in contrast to the rather cautious attitude of businesses in the past six months.  An upswing in student debt and car loans has halted the decline as households have shed debt (delevered) either by foreclosure, default, paying down balances or not charging as much.  Household Credit Market Debt outstanding (includes mortgages, car loans, student loans, revolving credit) indicates a growing willingness of consumers to take on more debt. 

On a per person basis, our debt has declined slightly from the peak of 2007 but is still way too high, leaving many of us vulnerable to a subsequent downturn, slight though it might be.

Just how bad has this recession been?  In previous recessions, households cut back their debt to “only” a 5% growth rate.  For the first time ever, the American people reduced their debt growth rate below 0. It is only in the past two years that this rate of negative debt growth is approaching 0.

Here’s the BUT. The underlying fragility of confidence was revealed this past Friday when the U. of Michigan Consumer Sentiment poll showed a plunge in confidence from over 82 in September to 74 in October. For the first time since the recession started in late 2007, the consumer confidence index had finally surpassed 80, only to fall back again the following month.  In a relatively healthy economy, this index is above 90.

To summarize so far, we have a consumer slowly and haltingly gaining more confidence, spending more and keeping the growth rate of her debt in check.  We have an overall economy that is behaving rather tiredly, growing tepidly as though on the downhill of a long boom cycle; that’s a problem since this has not been a boom cycle in the past few years.  So how are corporate profits doing?  Fine! Thank you!

In this past quarter, profits rose by 18%.

Starbucks, the coffee giant, announced this week that they would voluntarily pay some British income tax this year instead of moving the profits to some low tax country and avoiding British income taxes.  It appears that their customers discovered that they had been (legally, mind you) avoiding paying income taxes and were mobilizing to boycott Starbucks’ stores in Great Britain.

Interest rates kept near zero by the Federal Reserve have been a feast for many international corporations.  At the end of October, U.S. companies have issued $1.1 trillion in investment grade and high yield bonds (Source), responding to investors’ thirst for higher yields. That is an increase of 26% over last year’s bond issuance. International companies are, quite rationally, borrowing at the lowest interest rate they can find around the world, then spread that money to their subsidiaries in other countries.  They pay the lowest income taxes they can find internationally and shuffle the paper profits around the world. 

Ok, where were we? Oh yeah, cautious but more confident consumer, tepid but possibly improving GDP growth and record corporate profits.  Oh yeah, and record Federal Debt – over $16 trillion and counting.

Pity the poor corporations who pay the highest income tax rate in the world – except that they don’t.  In 2011, it was about 20%.

Record corporate profits, record low effective corporate tax rates, record low borrowing costs for corporations and record high Federal Debt.  The largest companies heavily lobby Congress to keep their tax rates low.  No matter how high profits are, companies publicly worry about their profit forecast and the economic outlook.  These large companies have become adept at convincing Congress that they are struggling.  Half of the Congress thinks that they must help these poor companies create jobs; key committee members craft more tax goodies and bury these goodies inside large appropriations bills.  Congress underfunds regulatory agencies so that they are effectively outmanned by corporate legal departments.

The lack of corporate tax revenues contributes to the Federal debt; over the past fifty years that share has declined from 20% of Federal revenues to about 10%.  If the share of Federal revenues had remained at the 20% level of the 1960s, the Federal Debt would be $7.4 trillion today, not $16 trillion.  Calculating savings on interest paid on the smaller debt would lower the actual debt to about $6.8 to $7 trillion.

Big increases in productivity have helped fuel the strong rise in profits.  Investments in technology as well as higher skill and education levels have enabled American workers to record levels of production but they have not shared in the gains from those increasing levels of production.  The U.S. has risen to the same levels of income inequality as some emerging countries:  China, Venezuela, Ecuador and Argentina.

To recap:  record high corporate profits due to record high worker productivity which has not benefited the workers, record low effective corporate tax rates and share of the costs of government, record low borrowing costs for corporations, and record high Federal Debt.

All of this largesse to multi-national U.S. corporations begs the question: Where are the jobs? But that I’ll leave for next when we look at the November Labor Report released this past Friday.

Productivity and You

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In an article for the online magazine Slate, Daniel Gross presents the plight of the many employees who have jobs and are fed up with them.  I’ve been there, done that – a number of times in my life – so I can relate.  Now I’ll give you the other side of the picture.

Appearing before the House Joint Economic Committee on Aug. 6th, Keith Hall, the Commissioner of the Bureau of Labor Statistics, reported that about 98% of employees in this country work for a company with 50 employees or less.  He stated that there have been small increases in hiring by larger companies but hiring by small companies is flat or has decreased slightly.

Small companies are the economic engine of this country and they are not hiring.  Until small company owners starting hiring, workers will continue to endure almost record unemployment. This administration has only just begun to address this issue with talk about a loan program for small businesses.  For the past 1-1/2 years, they have been focused on the viability of big companies, those that produce 2% of the jobs in this country.  This administration thought that by helping the big guys, they would be helping the little guys – a kind of trickle down economics.  By the time the presidents and many vice-presidents at the big companies get done taking their share of the administration’s stimulus money, that’s about all that is left for the smaller companies – a trickle.  Little wonder that the real engine of this economy is sputtering.

The reluctance of small business owners to hire is due to several factors:  caution, fear, and uncertainty about future sales are top reasons.  Others are: a lack of readily available business loans, excessive employee regulations and the burden of employee payroll taxes and benefits.  Politicians like to make promises of a safety net for all employees, but who builds that safety net?  Small business owners.

Many small businesses have had to lay off employees in the past 2 – 3 years and those layoffs jack up the unemployment rate on each business.  In response to the rise in unemployment, many states also charge employers an additional tax surcharge.  My company’s unemployment insurance rate has quadrupled in the past two years. If a small business owner hires an employee and business drops off after six months, the owner will have to let the employee go, which will only increase the unemployment insurance rate again.  This self-defeating cycle of increasing taxes only makes small business owners more cautious about hiring.

In a downturn, small employers try to let those employees go who have the least productivity, leaving only the more productive workers to get the job done.  As a result, productivity goes up.  During downturns, the employees who have jobs are reluctant to push for raises and that, in turn, keeps a damper on labor costs, which helps increase productivity.  There are a number of other factors that have contributed to increased productivity in the past decade, but the chief one is investment in technology.  Better technology has enabled workers in a variety of industries to be more productive.  Daniel Gross, the writer of the Slate article, seems to think that it is because employees are working harder.  While that may be a minor contributing factor, people can only work so hard.  Better tools produces the biggest sustained gains in productivity.

The Bureau of Labor Statistics recently released their preliminary report of productivity for the quarter ending in June. For those readers who like graphs, the first page of the report has graphs of productivity for the past 5 years. For the first time since 2008, productivity declined about 1%.  In late 2007 and early 2008, labor costs increased dramatically, putting downward pressure on productivity.  Does Daniel Gross think that the downturn of productivity in 2008 meant that workers were goofing off that year?  When the economy gets strong or overheated, workers can demand higher pay for their work, which lowers productivity. 

There is an old saying “I never got a job from a poor person.”  While that may be true, it is also true that, for most of us, we get a job from a small business owner and most of those owners are not rich, just a bit better off than the people they hire.  Many smaller businesses are funded in part by the equity in the owner’s home.  The owner borrows against that equity to expand a small business or to fill in the cash flow gap that occurs frequently to many smaller business owners.  As the real estate market tanked, many small business owners saw their home equity decline or evaporate, making banks less willing to extend a business loan.

What answers does each of our political parties have to this small business funding crisis?  After 1-1/2 years of not thinking it was a problem, the Democrats will craft some complicated program that involves a lot of paperwork that small business owners will have to fill out.  What do the Republicans offer as a solution for the small business lending crisis?  Why it’s the one answer that Republicans give for all problems – lower taxes.  Neither party could fix a leaking drain.