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!

Thomas Piketty: Neo-Marxist OR Neoliberal Capitalist?

"Production is carried on for profit, not for use. There is no provision that all those able and willing to work will always be in a position to find employment; an "army of unemployed" almost always exists. The worker is constantly in fear of losing his job. Since unemployed and poorly paid workers do not provide a profitable market, the production of consumers' goods is restricted, and great hardship is the consequence. Technological progress frequently results in more unemployment rather than in an easing of the burden of work for all. The profit motive, in conjunction with competition among capitalists, is responsible for an instability in the accumulation and utilization of capital which leads to increasingly severe depressions." - Albert Einstein, in 'Why Socialism'


The immense buzz and controversy surrounding Thomas Piketty and his 700-page work, 'Capital in the Twenty-First Century', continues in both the national media as well as amongst bloggers and in the 'water cooler' conversations of many educated citizens. Alas, many of the takes on it are off mark and show again why an exclusively American perspective can't be trusted - any more than it can in the venues of political assassinations, national security (see e.g. the horrid blather enunciated this a.m. by faux liberal Bill Scher of 'liberal oasis',  who actually stated Snowden "couldn't prove concrete abuse by the NSA" and that we mustn't be "dismissive of authoritarianism") or economics. Indeed, it is in economics that perhaps the biggest distortions of all reside because too many of our countrymen are either uneducated in that area, or brain washed by the Neolib media. (See, e.g.
http://brane-space.blogspot.com/2011/09/economic-lies-distortions-and.html )


To remind readers, Piketty's tome methodically researched hundreds of years of French tax records - which are amongst the most detailed in the world - given the French bureaucracy was intent on meticulously documenting who was wealthy and how much they'd amassed since the French revolution. Clearly, the purpose was not to have a replay of that horrific historical spasm. Thus the French government is committed to ensuring the nation doesn't re-commence a benighted economic trajectory such as exhibited by 18th century France - which saw most of the one percent's heads lopped off in the guillotine.

With the assistance of Berkeley scholar Emmanuel Saez, Piketty's monograph also integrated 15 years of similar tax records from 30 other nations, including the U.S. In concert, the records disclosed the rich inevitably make out like bandits, even after major financial downturns. This is possible because the rate of return to wealth (r) inevitably exceeds the rate of growth (g) of the revived economy. Hence, the share of national income that labor receives as compensation is invariably lower than the share accruing to rentiers and speculators via investments, speculation. Because capital -rentier income is less equally distributed than work income (most Americans don't own stock shares), the wealthy prosper while the rest suck salt.

Worse, the phenomenon of inheritance - with little redistributed via estate taxes- ensures the wealthy keep their ill gotten gains.The U.S. itself didn't always have inherited wealth play such an immense role in inequality.  That didn't really take off until the Reagan Years and conservative think tanks changed the language - using the term "DEATH TAXES" instead of Estate Taxes. Too many dumbos spotted the word "death" - got stupid, and backed off proper taxation.

Piketty's data show that indeed, inherited wealth metastasized inequality because the scions of the wealthy can then park their capital in rentier venues: dividends, profits, capital gains, interest and so on- and just let it grow while they sit on their asses. As a result, the gaping inheritance disparity actually grows more gaping each year after the inheritances have been received. Combined with the tax disparity (job income taxed far more than investment income) the rich get richer every year.

Supporting Piketty's work, a 2011 study by Edward Wolff and Maury Gittleman found that the wealthiest 1 percent of families had inherited an average of $2.7 million from their parents. This is 447 times more money than the least wealthy group of people — those with wealth less than $25K — had inherited. In between the wealthiest and least wealthy groups, inheritance levels ran in exactly the direction you would expect: the wealthier a group of people, the more they had inherited. From this the more inequality could be forecast over time.

Despite all this, the reactionary Right media has classified Piketty as a  latter day "Marxist" (see, e.g. 'Inequality and the Fate Of Capitalism' in The National Review, by Scott Winship).   Winship writes, for example:


"One of Piketty's charts projects that after capital taxation, r will rise and exceed g, as it has for most of modern history, inspiring Piketty's fear of exploding wealth concentration. However, a less -celebrated figure projects that the pre-tax r will be lower  in the future than it is today. Piketty's post -tax projection leads to exploding wealth only because he has assumed that taxes on capital will disappear in the 21st century. Take away that assumption and economic growth rates will still exceed the after-tax return to wealth through mid-century."

Actually, Piketty doesn't assume taxes on capital will "disappear" only that they will continue to be ever lower in relation to taxes on labor - an idiotic inversion which feeds the inequality beast. Indeed, without any ability to foresee the overthrow of the Neoliberal capitalist system - including its political edifice - Piketty is quite justified is making his assumption. The earlier book, The Judas Economy - The Triumph of Capital and the Betrayal of Work (1997)  by William Wolman and Anne Colamosca, shows indeed that the Neoliberal state has consolidated since its writing. With no counter political force strong enough to displace it on the horizon, why not make such a projection  - given that even the large communist states (China, Russia) have gone the way of market capitalism?

The claim that removing the Piketty assumption shows "economic growth rates will exceed the after tax return to wealth by mid-century"  is also misplaced. Indeed, we've already passed Peak Oil (in 2005) so that the costs of every facet of the economy - driven by spiking commodities' costs, especially oil but also collateral costs therefrom -will drive us to a "losing wicket" in terms of economic growth. See also: www.dieoff.org

Thus, economic growth  by mid -century will be far into negative territory, probably minus ten percent a year or more, and this is likely a conservative estimate. It cannot be otherwise, given the extent to which high quality oil has supported the unusual  economic growth and no more high quality oil remains. See again the link above, in particular the sections to do with economics and energy!

Neo-Marxist Piketty? Really?


Let's get another perspective here, from a Frenchman (Pascal Emmanuel Gobry) who recently wrote an article on Piketty in the WSJ.  Gobry writes that Piketty's book never caused a similar sensation in France as it did in the U.S. and:

 

"The reason for this disparate reception is simple enough: What drives discussion and sales is controversy, and the idea that capitalism produces ever-increasing inequality and fundamentally corrodes the social order is controversial in the U.S. In France, it is the opposite of controversial—it is Gospel. Truly, no one is a prophet in his own land.

There is probably another reason why Mr. Piketty isn't as influential in France as he could be: He is a serious thinker."

Gobry goes on to elaborate further:


"In France, many famous economists sell books and appear on TV talk shows. What most of them have in common is the lack of a degree in economics or of any peer-reviewed publications in economics. I myself am no economist—but I have been introduced as one on a French news program. Mr. Piketty is an outstanding academic economist, which, in France, hurts his credibility as an economist.

It is an amusing reminder of the differences between France and the U.S. that, while Mr. Piketty's views put him well to the left on the American political spectrum, in France, he has sometimes sounded like a conservative. He opposed the last Socialist government's signature policy, the globally infamous 35-hour workweek, and he called for cutting payroll taxes. At bottom, Mr. Piketty remains that most familiar of characters in the policy debate: a neoliberal economist who sees many virtues in market forces but favors government redistribution to smooth out some of the market's excesses."

A Neoliberal economist? Whoa! Of course, this information dispatched many right wingers into a state of frothing hysteria, dismissing him then as a "Marxist useless imbecile masquerading as a conservative" -  as on hotair.com.  But anyone who's followed my blog posts on economics would see that any guy that opposes a 35 hour work week and calls for cutting payroll taxes - has to be a Neoliberal. The last is especially indicative, since it guts the very social contract that supports social insurance payments  and places the latter in the hands of political poltroons.

Recall here Henry Giroux's description of Neoliberalism's mandate:

As an ideology, it casts all dimensions of life in terms of market rationality, construes profit-making as the arbiter and essence of democracy, consuming as the only operable form of citizenship, and upholds the irrational belief that the market can both solve all problems and serve as a model for structuring all social relations. As a mode of governance, it produces identities, subjects, and ways of life driven by a survival-of-the fittest ethic, grounded in the idea of the free, possessive individual, and committed to the right of ruling groups and institutions to exercise power removed from matters of ethics and social costs...."

Well, refusing a 35-hour week (which would necessitate higher wages to compensate for shorter hours) and cutting payroll taxes - which foot the bill for social insurance - definitely plays into this.  Gobry again:

"Mr. Piketty is, in short, that increasingly rare thing: a pure product of the French meritocracy, the working-class child who went to public school, worked his way to an elite school and ended up in prestigious government service (he co-founded and led the government-run Paris School of Economics). This is the model that built France's postwar revival but now stands broken."

Hmmm......sounds markedly like the (Milton) Friedman school of economics .....that now also stands broken here in the U.S.

 

Gobry's final point is perhaps the most germane:

 

 

"Mr. Piketty is right about some things and wrong about others, but his worldview is hardly radical. It could even be embraced by someone on the right who is troubled by inequality and worries that enormous differences in wealth, if left unchecked, could undermine the social order.

 

Indeed, for all the huffing and puffing about Mr. Piketty's supposedly revolutionary ideas, that conservative insight might be his most lasting contribution to the American debate."

Something to think about!

See also:
http://www.smirkingchimp.com/thread/richard-eskow/56198/the-real-piketty-scandal-is-right-wing-deception