FSO Editorials: "Economic Productivity Report" by Michael W. Hodges 03/06/2007

ECONOMIC PRODUCTIVITY REPORT
by Michael W. Hodges, Author
Grandfather Economic Report
March 6, 2007We have heard much about great U.S. productivity. Better than ever, some brag.
But - - is it true? See charts below for the facts.

Why are some hyping productivity as if the economy is on newly-created steroids?

While at the same time, savings plummet to record lows, debt ratios explode to record highs, trade deficits soar to new records, the manufacturing base shrinks to new lows, real median family incomes stagnate even with two wage-earners, purchasing power of a dollar continues to fall domestically and internationally and other major high-cost nations such as Germany & Japan are more productive. One should ask what productivity?

This Productivity Report is a chapter of the Grandfather Economic Reports of negative trends facing our young (debt, healthcare, incomes, savings, energy, etc.) compared to prior generations and to other nations. By high-lighting data evidence in picture form, it is hopeful more people will be better informed.

Most economists agree that high, steady growth rates of productivity and savings are a major driving force necessary to improve long-term real family incomes and living standards. I add without resorting to added debt.

Ideally productivity rates should be increasing on a long-term path, with rates higher than the 1950's when family incomes dramatically increased with one wage-earner per family and households lived well with nil debt. This has not happened.

QUESTIONS:

Do families and their children deserve to inherit an economy which produces the type of productivity improvement that causes national income to rise without increasing debt, causes personal savings to rise year after year, causes the internal buying power of a dollar to rise each year, causes a trade surplus with the rest of the word and a rising manufacturing base with a stable foreign exchange rate of the dollar? We should hope so.
Do they deserve to realize steadily increasing real median family incomes each year and to realize increasing foreign reserves per person?
Are we being fair with the situation being passed on to the young generation by claiming record productivity, as if all of a sudden America was more productive than ever before, when in fact we are less productive than before - - since we need more debt each year to produce national income than before, savings fall, our manufacturing base declines and trade deficits soar?
How can anyone claim national productivity if even government long-term data shows the opposite, even by its own measure of productivity?
Have we become a nation of 'debt-junkies' for our younger generation, instead of a nation truly growing real productivity?

This grandfather is not very proud of this bequest. A few pictures will show why? Then, you can make your own judgment regarding productivity backed by hard data.

PRODUCTIVITY GROWTH RATES
54 year down-trend - traditional measure

The left chart shows the annual change in business sector productivity measured over the past 5 decades using the Bureau of Labor's definition.

The chart proves that claims by some that the U.S. enjoys huge productivity growth compared to the past are a myth, even though this traditional measure of productivity (output per hour) disregards important stuff like soaring debt in all sectors, exploding trade deficits and collapsed savings with stagnant real family incomes.

This data represents the yearly percentage change in output per hour of all persons in the business sector. (data source: Bureau of Labor Statistics)

From the left side of the chart (1951) to today it can be seen that productivity rates have followed a declining exponential trend [red line].

In the 1950s and early 1960s productivity rates oscillated in the 3-4% range. Thereafter, productivity rates became more and more erratic with wider and wider swings as the averages trended down toward the 2% rate level. The apparent up-tick several years ago was suspect - as discussed below - which recently reversed to the downside.

Caution. It's a bit disconcerting to note that during the late 1990s, the peak of a long economic expansion failed to produce productivity rates anywhere near the higher ratios of the late 1950s and 1960s when family incomes were moving up quite rapidly - - even after using new (more favorable) data measurement criteria in the past several years (see below) - - and especially after debt ratios to national income soared.

Now ask yourself this question: Looking at this chart, can you see where productivity has been the best ever as we have had constantly pounded into our heads? I can't. In fact, the government's own measure per this graphic has been declining over time. Wondering why we were told otherwise?

And even by the above traditional measure of productivity, the US economy in 2006 recorded its lowest rate of labor productivity growth in more than a decade with growth in output per hour worked falling significantly behind the European Union, Japan, China and India.

Now that we have looked at the traditional way of measuring productivity (above graphic), let's get a bit more realistic in how we think about this term.

TRADE DEFICITS INDICATE LACK OF RELATIVE PRODUCTIVITY

If the U.S. had adequate productivity, it should be most competitive compared to other nations and therefore produce trade surpluses. But instead, the U.S. produces huge, record trade deficits.

This leads one to ask > WHAT PRODUCTIVITY?

The left chart displays the trend of America's trade deficits in merchandise goods as shown in the International Trade Report. 2006 produced a new deficit record of $836 billion. 1985-2006 cumulative deficits totaled $6.6 trillion.

About the past several years, one writer reported: "If the US enjoys higher 'productivity,' why has the trade deficit exploded during recent years to new records? In an economy that is mostly based on 'services', how can higher so-called 'productivity' generate the funds that will be needed to repay the debts, which financed a trade deficit that consists mostly of 'goods'? Will 10 million Japanese and 20 million Chinese come every year to tour the US? How can competitiveness rise as the result of higher 'productivity,' if at the same time the trade deficit soars and private sector debt ratios surge to new records? What competitiveness? Of burger flippers, salesmen and Wall Street paper creators and more and more debt paper?" [emphasis M. Hodges]

If it were true that productivity was higher than the past, which the chart above proves is not the case, then the U.S. should be experiencing record trade surpluses because of increased competitiveness. Instead the U.S. is experiencing record trade deficits, indicating declining productivity if measured in a manner that makes sense.

We also see huge deficits in the U.S. compared to surpluses in higher-pay industrial nations such as Germany & Japan. In the 12-months to February 2006 the U.S. had a total merchandise trade deficit of $789 billion, while Japan & Germany produced a cumulative trade surplus of $283 billion ($86+$196). That's a whopping $1.07 trillion worse relative trade performance for the U.S., in JUST ONE YEAR against JUST 2 NATIONS.

This leads one to ask: WHAT PRODUCTIVITY?

AMERICA'S DIMINISHED DEBT PRODUCTIVITY
The following is from the chapter called "America's Total Debt Report"

If America was more productive, then less debt would be needed for each dollar of national income. But the reverse is true. We are less productive regarding debt than ever before.

Each dollar of economic growth requires more debt per dollar than before - now over twice as much - and the national income achieved per dollar of debt dropped 57%.

The above chart shows that in 1957 there was $1.86 of outstanding debt for each dollar of national income. But, today's economy needs $4.42 in outstanding debt for each dollar of national income. That's double the outstanding debt load per dollar of national income.

That extra $2.56 of debt produced zero national income.

This chart shows the reciprocal and the diminishing returns resulting from debt. It shows the declining amount of national income achieved by the economy for each added dollar of debt. In 1957, 54 cents of national income resulted for each dollar of debt. But, today only 22 cents of national income resulted per dollar of debt. That's a 59% drop in national income per added dollar of debt.

The left graphic above looks at total debt outstanding vs. national income at end of each year, which is the correct long-term approach. However, if we look at differences for just one year, 2005 vs. 2004, $3.54 trillion of new debt was added in 2005 and yet national income that year increased just $448 billion. This means it took $8 of newly-added debt to produce each new dollar of national income - - a huge figure, which helps explain the soaring trend above.

Here's another chart from 'America's Total Debt Report'

debt-total-ratio-trend.gif (6227 bytes) A chart above showed America's trade deficits started soaring in the late 1970s to early 1980s. Today's deficits are increasing even faster.

Now look at the left chart, from the powerful chapter 'America's Total Debt Report' It shows America's total debt (sum of all government debt and all private debt of households, business, and financial sectors) started to grow faster than growth of the economy's national income at about the same time (late 1970s to early 1980s) and increasing even faster today.

What this says is that debt drives over-spending, and over-consumption beyond incomes and savings.

Therefore, excessive debt also drives imports faster and faster, driving soaring trade deficits.

This chart is a ratio chart of total debt in America to national income. If America's debt dependence were not growing faster than the economy during this period, the chart's trend line would have remained horizontal.

AGAIN we ask our question: If we are more productive as a nation then why does it take more debt creation each year to produce national income?

This leads one to ask:
WHAT PRODUCTIVITY?

DECLINE OF THE MANUFACTURING BASE

If the U.S. had adequate productivity then why should its manufacturing base shrink - - instead of grow?

How can America ever export enough goods to other nations to balance its negative balance of trade of soaring merchandise imports if it has a declining manufacturing base?

The left chart, from the Family Income Report chapter about stagnant income growth, shows the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) - - from 26% in 1960 to 10% in 2004, a 60% drop in the manufacturing ratio.

On a GDP basis the same negative trend occurred > the U.S. manufacturing base declined from 30.4% of GDP in 1953 (when we had a trade surplus) to 12.7% in 2003 - a 58% drop in the manufacturing share of GDP - and more of the remaining manufacturing base is foreign-owned than before. (Bureau Economic Analysis, Economic Report of President appendix table b-12)

COLLAPSE OF SAVINGS

NET PERSONAL SAVINGS RATE
world history record low

Many times in recent years there has been much bragging about how productive America is.

If the U.S. produced adequate productivity by a realistic measure then personal savings should soar. Why, instead, do savings plunge below zero?

The chart at the left shows a 47-year trend of that part of disposable income that has been saved - - called 'personal savings rate'. Prior to 1970 the rate of personal savings increased smartly - - as were family incomes - despite most families then having but one wage earner while also living without huge debt ratios.

This chart shows the collapse of savings since the late 1980s, to the lowest ratio in history. As of Summer 2006, savings were negative 1.6 percent - an all-time record low!! Also "a record low for any leading global economic power in the modern history of the world," per economist Steven Roach Nov. 2006.

Lacking in domestic saving America imports savings from other nations. Estimates suggest America absorbed about 70% of the surplus saving elsewhere in the world in 2005-06. What kind of so-called productivity is that? [More about savings in the Family Income Report.]

Disappearing personal savings and soaring debt (in all sectors) may drive consumption (and GDP) beyond personal income, but what does it mean concerning future family incomes, prosperity and economic security as such practices place our young generation more at the mercy of foreign interests?

PURCHASING POWER EROSION

inflation.gif (6116 bytes) If the U.S. produced adequate productivity, the internal purchasing power of each dollar should rise. Why, instead, does its buying power fall each year?

This chart, from our Inflation Report chapter, shows an 88% reduction in the value of a dollar (its internal purchasing power) since 1950, where a dollar of 1950 is worth but 12.3 cents today - based on the consumer price index.

For this chart, the average annual inflation rate since 1950 was about 4%. To some people 4% doesn't sound like a big number. But, compound 4% over 50+ years and the 1950 dollar is worth but 12 cents today as seen in the chart.

(Compound it out another 50 years into the future, when today's 15-year old will retire and the value of today's dollar will be worth just 12 - another 88% plunge - bringing it to a value of just 2 cents when compared to the 1950 dollar.)

Adequate productivity, by a proper measure, should produce a rising line in this chart of a dollar's purchasing power - - not falling purchasing power.

STATE & LOCAL GOVERNMENT EMPLOYEE PRODUCTIVITY

This sector employees more workers than any other sector in the national economy. How can some claim higher productivity in America, if there is a negative productivity regarding state and local government employees, since their headcounts increase each year faster than general population growth?

qty-per-100.gif (4290 bytes) Few citizens recognize the massive growth of state & local governments - from 6% of national income in 1947 to an 18% slice of today's economic pie. Many wrongly think big government has only occurred at the federal level.

Most of us know each working person today is required to 'carry on their back' more seniors than any prior generation with less expected in return than available to current seniors. (see Social Security Report).

But, few know each citizen also 'carries on their back' 3 times more state & local government employees than before with less education quality in return. A double-whammy!!!

This chart is from the chapter State & Local Government Spending Report). In 1946 there were 2.3 state & local government employees for every 100 citizens. Last year there were 6.5 such government employees for each 100 citizens. That's an increased load of 4.2 more employees per 100 citizens than before. Employee counts increased 50% faster than the general population since 1990.

If this sector's productivity had just kept even with population growth today, there would be 12 million fewer such workers in that sector, resulting in huge reductions in property taxes, sales taxes, and income taxes with much lower regulatory costs burdening today's families. If that sector had increased productivity, the difference would be even larger than that 12 million excess.

A 64% reduction of these employees would be required to meet the prior employee-to-citizen ratio.

More often than not state & local government employees receive more job security, more time off, higher pay, better medical insurance & pension benefits and inflation protection than most private sector employees. And, today most local governments out-source many services (trash collection, etc.) performed by their own employees in the past, which should reduce per capita counts, not increase them.

True productivity and efficiency improvement by state and local governments should result in fewer and fewer employees per capita - not more. QUESTION: How many state and local governments specifically show reductions in their budgets headcount from budgeted productivity improvements? Check your own local government for the answer.

HEALTH CARE PRODUCTIVITY - compared to others

The chapter called the Health Care Report makes the following statement, with back-up data graphics "U.S. citizens realize less life expectancy than citizens of other nations and the U.S. ranks only 37^th in the world in quality health care - yet nationally America spends 82% more per person on health care than others - even U.S. federal and state governments spend more on health care than other governments

EDUCATION PRODUCTIVITY

schoolhs.gif (2984 bytes) The chapter called the Education Report graphically shows declining education productivity measured as quality output to inflation-adjusted spending per student.

Additionally, there is significant lagging education quality performance in math and science of U.S. students compared to those in other nations as shown by data graphics in the International Education Report and in the International Test Report - - yet the U.S. spends more more student. That's a type of NEGATIVE Productivity.

U.S. PRODUCTIVITY COMPARED TO OTHER NATIONS

U.S. productivity growth vs other nations The left chart compares average annual productivity growth of the U.S. vs. Japan and Germany for the period 1989-1998. [Note: these comparative rates are considered 'apples vs. apples', whereas in 1999 and 2000 the U.S. government decided to revise how they measure and thereby pump up restatements - see article below.]

Productivity is here defined as GDP per employee.
Data is from Eurostat; IMF

For proper comparisons, it is important to strip out the impact of the differing economic cycles between nations. This is best done by comparing productivity growth rates between nations for longer periods (such as in this chart) instead of making short-term comparisons of a year or so

This chart shows that for the past decade, U.S. productivity growth significantly lagged Germany and Japan, which are considered major competitors for comparison purposes. These same nations also far out-strip the U.S. in savings growth.

And, despite these high-cost nations experiencing a rising exchange rate vs. the dollar - as mentioned above > In the 12-months to February 2006 the U.S. had a total merchandise trade deficit of $789 billion, while Japan & Germany produced a cumulative trade surplus of $283 billion ($86+$196). That's a whopping $1.07 trillion worse relative trade performance for the U.S., in JUST ONE YEAR. In 2001, for the first time, China surpassed Japan as the country with the largest trade gap with the United States. America's deficit with China surged 95% in the next 3 years, reaching $162 billion and 26% of total US trade deficits in 2004.

Where, then, is the real U.S. productivity?

LEGAL SYSTEM IMPACTS

QUESTION: Perhaps some may believe having many times more lawyers than other nations, and adding lawyers faster than population growth, increases meaningful productivity compared to our past and U.S. competitiveness compared to foreign firms today.

Now, for some fun, for a change...

"America has 281 lawyers for every 100,000 people compared to Britain with 94, 33 in France and a mere 7 in Japan." (Source - The Economist, p 35, December 16, 2000)

UPDATE > 2003 data shows the number of lawyers per 100,000 citizens increased to 361 (28% more than 281 shown in the chart), according to population data and American Bar Assoc. (http://www.abanet.org/marketresearch/2002nbroflawyersbystate.pdf)

Therefore, not only does the U.S. have many times more lawyers per 100,000 citizens than other nations, but the continued growth in U.S. lawyers faster than growth of the total population indicates negative lawyer productivity.

Has this huge density and growth of lawyers helped improve America's real productivity, reduced debt ratios, increased saving ratios and reduced trade deficits compared to the past?

It is interesting that the chart ranking of these nations regarding lawyer concentration correlates with the same ranking concerning trade competitiveness and inflation rates. The fewer lawyers the better!

Trade: while America has the highest density of lawyers, it also has the greatest current account (foreign trade competitiveness) deficit ratio to GDP. Japan, with the fewest lawyers, has the world's highest trade surplus. Current account data 2003: USA 5% GDP deficit, Britain 2.1% GDP deficit, France 1.3% surplus, Japan 3% surplus. Same ranking in December 2000: USA 4.3% GDP deficit, Britain 1.6% deficit, France 2.3% surplus, Japan 2.5% surplus. (see International Trade Report)

Inflation: the higher a nation's lawyer density the higher it's inflation ratio, in comparison to the other nations shown. Inflation data 2000 period: USA 3.4% (with numbers by 'new methods' - see Inflation Report), Britain 3.2%, France 2.25%, Japan 0%.

From this data one could argue that the higher a nation's lawyer ratio the less competitive it is regarding international trade - and the higher it's inflation rate. The above chart suggests that once a nation has more than 50 lawyers per 100,000 person population the above correlation results. It could further be argued that by this measure the USA, with a lawyer density ratio of 281, has 5 times too many lawyers. Whatever the excess, the fact citizens trust in the ethics of lawyers reaching new lows and thus suggests troubling implications looking forward.

A November 2003 email from a reader in Austria: "One of the items in the US where we shake our heads about is the high number of lawyers taking over the whole society and literally keeping it at ransom. In Europe, if one loses a lawsuit, he has to pay all costs. This makes suing risky."

U.S. Companies Spending a Fortune in Court. The typical U.S. company faces an average of 305 lawsuits and spends $12 million a year on litigation alone, not including settlements or judgments. The survey also notes that government inquiries — particularly from the Securities and Exchange Commission and the Occupational Safety & Health Administration — and internal investigations requiring outside counsel are on the rise. A strong majority of companies, 63 percent, also said they had hired outside counsel to conduct internal investigations. 10/13/06 > http://www.cfo.com/article.cfm/8044747/c_8044815?f=home_todayinfinance

LASTLY - - SOME 'FUN', FOR A CHANGE - - AN AREA OF INCREASED PRODUCTIVITY??

from the Health Care Report

obesity trends

BOTTOM-LINE:
We must not be misled by so-called 'productivity' growth.

SHOULD WE DO BETTER IN THE INTEREST OF OUR YOUTH ?

The above is a part of the Productivity Report on Grandfather Economic Report. To review the total report with various learned studies - go here For more information, read the following report>> Federal Spending Trends - and America's Total Debt Report, the International Trade Report, the Federal Government Debt Report and the Family Income Report found on the HOME PAGE - This Productivity Report is frequently updated at > http://mwhodges.home.att.net/product.htm

Exchange information with Michael Hodges via E-mail - - Constructive input and links are welcome

Contact Information
Michael W. Hodges
Grandfather Economic Report
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