Friday, September 2, 2016

The Productivity Conundrum Surfaces Again

Ask nine of ten economists what is the biggest controversy today, and apart from whether or not the Fed will keep raising interest rates, they are likely to respond "Productivity!"   In other words, is it really decreasing or is this merely a figment of our measuring tools and perceptions?  Never mind the ubiquitous smart phones and apps which facilitate most of the mundane actions of our lives, the BLS (Bureau Of Labor Statistics) keeps insisting that productivity is declining and has been over the last decade.

As TIME economic columnist Rana Foroohar observes (p. 20, Sept. 5):

"The BLS numbers are a big deal. With birthrates falling and immigration down, productivity needs to go up or we'll soon be worse off economically than our parents."

Foroohar goes on to assert that "the slowdown in productivity is now widely seen as one of the big factors in America's tepid recovery."

But I already put forward subtle physical reasons for this, namely that one can't reduce productivity simply to human labor but also to the quality of energy used to expedite that labor. This includes a whole spectrum of machines as well as the fuel- sources they need to run on.

What we already know, and this isn't even up for debate, is that the EROEI or energy returned on energy invested, has been steadily decreasing for almost two decades.  In the case of oil alone, what used to engender an EROEI of 16:1 to 19:1 several decades ago is now headed for 5:1. This means less efficient energy use and by extension less efficient use of human labor to produce whatever products or services are needed by a complex, mainly industrial economy. Take everything from MRI machines, to automobiles (and auto factories) , to passenger jets, a lower energy EROEI means a lower productivity for the manufacture of all of the above, because it takes much more energy to produce each unit.

Based on this, one sees that the retirement of higher skilled Baby Boomer workers is not fully to blame for the situation, nor is it the more laid back lifestyle choices of many millennial workers. Even if the Boomer workers remained on the job and the millennials all turned into workaholics it would not solve the problem and increase productivity.

Why isn't digital technology making a productivity difference? The basic reason is that no matter how much digital gizmos a company has if they lack access to higher EROEI sources they will still remain behind the productivity eight ball. And as author Matt Savinar has observed, ultimately all those digital apps, laptops, etc. depend themselves on the quality of the energy sources - as anyone can attest to when the power goes out.

The mistake "homo economicus"  continues to make, then, is confusing advancing technology with advanced energy supply. The point Savinar made ('Life After the Oil Crash') is that no amount of computer or other technology will make a dime's worth of difference if there isn't adequate energy to run all those devices on.

Just consider for reference the monumental snafu that occurred when Delta commercial planes across the nation were brought to a halt because their central ticketing  and coordinating center in Atlanta went down. This was ultimately traced  a blown electronic component, though Delta originally attempted to blame the power company.

Never mind, hundreds of flight connections were missed and millions of man hours lost because of this blown component. Now  consider, as Savinar implores us to do, what would happen if an entire power grid went down because of a massive blackout owing to excessive demand on the grid or lack of the high quality oil to run it.

No wonder then, that Northwestern University's Robert Gordon has posited that the Industrial  Revolution (at the turn of the 19th century) had a vastly bigger effect on productivity, economic growth than the so-called "PC revolution" in the 20th. Think about it! The former meant transition from the impossibly laughable energy of whale oil to kerosene, coal etc., a mammoth jump in the EROEI of available energy sources. The latter transpired over a period of roughly 20 years over which the EROEI of oil actually decreased from 16:1 to roughly 10:1 according to Savinar. So no wonder even millions of computers were not able to match the sheer change in productive output that accompanied the Industrial Revolution- and within the scope of the latter's purview we include the internal combustion engine, electricity, and indoor plumbing.

Gordon argues, and he's correct, that by the time the digital revolution got under way- say in the 80s- the big payoff in productivity began shrinking. Meanwhile, the PC-computing payoff basically has "come and gone" dissipating by 2004, when EROEI reached below 10:1 and fracking began as a last desperate effort to snare the vestigial ""riches" of oil - along with deep sea drilling.

Foroohar interjects certain techie skeptics who insist the BLS just isn't "counting productivity correctly". She adds:

"They argue the BLS is still too focused on the production of physical goods  missing hard to count benefits of the digital revolution".

But still, that misfires since as Savinar observed all that these benefits did is to expedite speed of transactions a bit (like in fractional stock trades and flash trades) but ultimately these too are hostage to EROEI and  energy quality. Thus, let too many flash trades be made in an increment of time delta t, and the whole system can't handle them. Then you see a flash crash like occurred in 2010. So in the end, it's all smoke and mirrors.

Foroohar points out this is also the conclusion of the Fed and IMF based on their own study. Thus, digital computing just doesn't make that big a difference .

Foroohar also points out:

"What we know for sure is that America's biggest run up in productivity occurred from 1945 to 1973, when there were major public investments in education, infrastructure, and worker training ".

But those investments didn't just occur in a vacuum. They were ultimately supported by the highest ever EROEI oil which hit as high as 19:1 in the early 1970s.

And as Foroohar's last statement puts it:

"Nobody us suggesting that productivity isn't rising because individuals aren't working hard enough. On the contrary, most economists believer the American blue and white collar workers alike are firing on all cylinders."

Indeed they are. It's just that the base energy they have to work with, to power their cars, computers or other machines, keeps declining in quality.

The next time you get into a debate with a co-worker or online econ aficionado about productivity be sure you bring up this aspect. It will render the discussion more serious, and they ought to thank you for that!

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