The U.S. Bureau of Labor Statistics Wednesday announced their revised estimate for first quarter labor productivity growth; it was minus 0.9%. When you look around the world, declining productivity growth is a tendency everywhere. There is a simple explanation; the anti-market distortions imposed on the global economy by mistaken policy are producing their effect in making the entire global economic system increasingly inefficient.

The same trend is true in U.S. multi-factor productivity, figures which were released last month. Multi-factor productivity (productivity net of labor and capital increases) was only 2.3% above its 2005 level in 2011, while capital inputs to the economy were 12.6% above that level. In other words, the rises in labor productivity that have occurred since 2005 have been almost entirely due to increasing capital intensity, with genuine multi-factor productivity increasing at a sluggish rate of below 0.4% — compared to an average of 1.1% in 1987-2005, which had been close to the long-term post-Word War II average.

I wrote in an earlier column that exceptionally cheap capital appeared to be boosting U.S. labor productivity (thereby preventing unemployment from declining) and that I expected it to continue doing so while capital remained cheap, even though multi-factor productivity growth was at best modest. This effect is the opposite of that visible in the early 1980s, when very high real interest rates suppressed labor productivity growth even though multi-factor productivity growth was robust and unemployment was declining rapidly. We now appear to have reached the end of that phase, and to have entered an era in which U.S. labor efficiency declines because resource allocation has become so distorted and inefficient.

You can see the same effect globally from looking at the Conference Board’s Total Economy Database’s series on Total Factor Productivity, a slightly different calculation from Multi-factor productivity which produces different but parallel numbers. In the United States, annual TFP growth shrank from 0.66% in 1987-2004 to 0.16% in 2005-2011. In the more successful countries of Europe, a parallel trend is seen, with German TFP growth shrinking from 1.11% in 1987-2004 to 0.61% in 2005-2011 (note that German TFP growth is consistently higher than that in the United States – so much for “old Europe” theorists.) In France, TFP growth shrank from 0.25% to MINUS 0.52% between the same periods, in Britain it shrank from 0.64% to minus 0.46%, in Italy it shrank from 0.12% to minus 0.66% and in Spain it shrank from minus 0.30% to minus 0.77% and in non-EU Turkey it shrank from 0.35% to minus 1.93%. In the other Anglophone countries, TFP growth shrank from zero in Canada in 1987-2004 to minus 0.60% in 2005-11 and in Australia from 0.48% in 1987-2004 to minus 1.33% in 2005-11.

Outside the U.S. and Europe the picture is different. In Japan TFP growth rose from an average of minus 0.22% per annum in 1987-2004 to 0.39% per annum in 2005-2011. In China, South Korea and India it stayed much higher, at around 2% per annum, rising in China and India and declining slightly in South Korea. Brazil however repeated the U.S./European pattern, declining from minus 0.07% per annum to minus 0.75%, as did Russia, declining from 1.68% per annum to 0.02% per annum.

The common factor among all these statistics is that where interest rates have been held at artificially low levels or government has distorted the economy, productivity has declined. In the United States, Europe, Canada, Turkey and Australia, interest rates have been held at levels below the rate of inflation for almost all the period since 2005; consequently multifactor productivity growth has declined since that date, even though consistent growth in labor productivity has disguised this fact.

Real interest rates were more solidly negative in southern Europe than in northern Europe – they were held down artificially by the economically suicidal “Target/Target 2” payments system, which failed to rebalance money flows out of the Eurozone’s weaker economies. Consequently productivity growth in those countries has been consistently worse .than in Germany, where very low inflation kept real interest rates near zero rather than negative. A further factor, especially in Britain, the United States and southern Europe has been the unprecedentedly high levels of budget deficits, which have misallocated capital to the unproductive state sector, further weakening productivity growth.

In China and India on the other hand, real interest rates were generally positive (until the last year or two in India); consequently production factors were less misallocated and productivity growth remained robust. In Japan, real interest rates went negative in the middle 1990s and giant government deficits further misallocated capital. Capital was better allocated during the Junichiro Koizumi period (2001-06), while consumer price deflation since then has kept real interest rates marginally positive, thus weakening the interest rate distortion. In Brazil and Russia, real interest rates have been generally positive, but since 2002 in both countries credit has been largely allocated by the government itself, producing productivity drags of a different kind.

With current policies in place, the productivity deficit is likely to get worse, especially in the United States. Gigantic budget deficits are funded by the banking system, starving small business of resources and steering funding into the nation’s most unproductive sector. Ultra-low interest rates discourage saving, de-capitalizing the economy further and producing declines in even labor productivity. Thus while current policies are in place, even labor productivity is likely to decline further, U.S. living standards will decline or at best stagnate and unemployment will remain very high.

The position in Europe is even worse than in the United States. The endless “rescues” of bankrupt southern European banks and overspending governments will starve the most productive countries of Europe of the capital they need to grow. Thus malaise will spread northwards from the Mediterranean to the northern European countries that have so far been largely immune to the disease. Saving will be suppressed by the ultra-low interest rates and punitively high taxes imposed on the continent to pay for the profligate governments and futile bailouts. In Britain, a profligate Bank of England and a self-deluding government, which believes it is achieving austerity when it is merely slowing the inexorable growth of the state sector, will continue to produce mediocre although not disastrous results.

The decision last week by France’s president François Hollande to reverse the single modest reform carried out by his predecessor and allow the French retirement age to revert from 62 to 60 is symptomatic of the self-defeating attitude of the European political class. They will subsidize the unproductive at every point, even when there is no possible actuarial justification for doing so, while imposing wealth taxes, ultra-high rates of income tax and innumerable pointless and costly regulations on the productive sectors. The European political class does not deserve to live in successful productive countries; the problem is that, like Germans forced by their politicians into abandoning the deutschemark for the euro, Europe’s citizens as a whole are not given the option of voting for anything else.

Outside Europe and the United States, the picture is a little brighter. Russia and Brazil will show themselves as the economic basket-cases to which their lousy governments have reduced them. However India and China may do a little better, if only because their citizens are still so poor that there is room for growth in spite of the failings of those countries’ governments. Wealthy East Asia, being well run and having avoided the Western diseases of too low interest rates and too much government spending, will continue to get wealthier. Latin America will separate itself further into the Hogarthian Industrious Apprentices of Chile, Colombia and maybe Peru and the Idle Apprentices elsewhere in the continent. And African countries in which even the most modest capitalist flowers are allowed to bloom will continue doing considerably better than they did in the lost decades before 2000.

All governments claim to revere productivity, but in the U.S. and Europe they are going the wrong way about getting it. Subsidizing the useless (including the ineffable rat-holes of the “green energy” sector) while taxing the productive, and keeping interest rates for years on end at levels that penalize the thrifty, cannot be expected to produce higher productivity and is not doing so. While current policies persist, those regions’ economic decline will continue.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)