The Bear’s Lair: We have passed Peak Productivity

The Bureau of Labor Statistics announced last week that U.S. non-farm business sector productivity unexpectedly fell 5.0% in the third quarter of 2021 and was 0.5% lower than its level in the third quarter of 2020. This returns the U.S. economy to a pattern of ultra-low productivity growth that first became evident in the Obama years, a dismal trend which seems likely to intensify in the next few years of President Biden’s term. Given the global environment, however, there may be an immensely depressing answer to an important question: was 2019 the peak of global productivity, with decline and decay in living standards inevitable for the future?

Productivity growth in the U.S. has now been declining for almost half a century. The brisk productivity growth of 1947-73, about 2.8% per annum, may well have been partly a catch-up from the inefficiencies of the New Deal 1930s and the war, or an effect of the U.S. being the global center for manufacturing innovation, but it was nevertheless a remarkable bright spot in U.S. economic history and human history as a whole.

The sharp slowing in productivity growth to a level of 1.8% per annum from 1973-2007 was almost certainly due to the blizzard of new regulations introduced under the Johnson and (more unforgivably) Nixon administrations. The environmental bureaucracy and legal harassment surrounding major new infrastructure projects alone produced a sharp slowing in innovation and a sluggishness and bloat in infrastructure investment that has lasted to this day – it is as if every major infrastructure investment is being run by the Pentagon bureaucracy.

After 2008, productivity growth slowed further still, to an average of 0.6% per annum in 2010-16. Part of the problem was a yet further intensification of regulation by the witlessly socialist Obama administration, but a more serious problem was the determination of the Fed to pursue an easy-money policy entirely unrelated to market forces. By setting the price of money at an artificially low level, the Fed ensured endless asset price inflation and suppressed the formation of innovative small businesses, which were the one economic force unable to access the funny money. Only in 2018-19, with the combination of President Trump’s deregulation and a mild return towards sanity in the Fed’s interest policy, did productivity growth recover somewhat.

Now President Trump is no more – for the next three years, at least. Regulation is back in extreme form and the Fed’s interest rate policy becomes steadily more distorting – not (for once) through any new fault of its own – it has failed to set rates below zero – but because inflation has reared its ugly head, making real interest rates sharply negative. With the 12-month producer price inflation at 8.6%, as revealed Tuesday and interest rates still around zero, real rates are now more than 8% below zero. The insanity of Fed interest rate policy has been put on steroids, and the negative effects on the economy are beginning to appear.

There are however other factors, beyond increasingly insane monetary policy, that are causing productivity growth to go into reverse. Regulation is spiraling upwards, as the world’s leftist leaders find they can achieve consensus at the COP-26 climate change conference and impose that idiotic consensus on the rest of us. The media aid and abet them in this, pretending that the 2.7 degrees Celsius increase in global temperatures now claimed by the enthusiasts at the UN will kill us all, when it is in fact only a 1.6 degrees Celsius increase from present levels, since the UN measures the temperature change from a supposed “pre-industrial” level, and we have already had a 1.1 degree increase from that level, most of it almost certainly through natural temperature fluctuation.

A 1.6-degree temperature increase by 2100 on its own will make very little difference in our lives, even if it happened, which I seriously doubt, but the steps being ordered by the COP-26 wokies to control our economies will have a very unpleasant effect indeed. What’s more, not all of their productivity-sapping effects will be measured properly. If the average man must replace his $30,000 car lasting ten years with a $50,000 Tesla that lasts five years, his living standards will not have changed at all, except for the sharp reductions in consumption that come from paying $10,000 ($50,000/5) per annum plus fuel and repair costs for personal transportation rather than the $3,000 ($30,000/10) he used to pay.

Nominal GDP will increase through the substitution of Teslas for Fords; real living standards per person, in terms of available goods and services, will sharply decline. Nominal productivity may be unaffected by these changes; real productivity, the number of minutes a person must work to gain the basic necessities of modern life, will enter a sharp spiral downwards (or upwards, in terms of the number of minutes). The Biden administration’s closing pipelines at random, making energy products more expensive and adding to the already immense pile of dead assets “stranded” by destructive regulation are only the first few of many steps in this direction.

Outside the United States, the same productivity-destroying monetary and regulatory policies are in force in all significant “rich” economies, and thus productivity growth can be expected to lag seriously behind historic norms, which in practice means turning negative, when you consider the rich countries as a whole. British and EU productivity growth rates were already close to zero in the 2010s, while Japan’s was already negative after surviving the 1990s collapse quite well; the additional drags of “climate change” policies and sharply negative real interest rates will depress productivity further.

Until 2019, productivity growth in emerging markets had been substantial – as was to be expected, since most did not have extreme monetary policies and globalization produced a welcome “catch-up” effect as their economies converged on those of the West. However, that favorable outcome may not continue. First, globalization has clearly gone into reverse; as Western supply chains get shortened and repatriated, the main productivity loss will fall on the low-cost economies that had set themselves up as suppliers. Second, the COP-26 global warming agreements will inevitably affect emerging market economies, preventing them from increasing their energy consumption as they would naturally do and thereby slowing their growth. Third, the negative growth (inevitable if productivity declines) in the rich countries will mean that emerging markets’ export opportunities will be sharply limited, producing real recessions there rather than the “managed decline” of the rich.

Overall, therefore, we cannot look to emerging markets to rectify the world’s productivity malaise. As for China, it is reverting rapidly to a centrally planned economy, and we know where THAT leads. Productivity growth will thus not just transfer from the decadent West to the growing south and east, it will disappear altogether and turn into permanent and accelerating decline.

Technophiles will respond that this is Luddite tosh; world manufacturing will shortly be undertaken by robots, so that current output or even more will be produced by far less human input – productivity being enormously enhanced thereby. But that raises again the question of how we should measure productivity. What is the productivity of a world in which only 5% of humanity is used to produce output and thereby lives quite well by current standards, while the remaining 95% of humanity exists in drug-crazed squalor on a “universal basic income” squeezed out of the productive through punitive taxation?

Divide output by the 5% of humanity who are actually working, and the figure may look quite healthy. Divide it by the 70% of adult humanity who may want to work but are unemployable, forced to live on handouts, and it will be far lower than that we enjoy today, as will average living standards. Labor force participation in the United States has been declining for the whole of this century; the productivity statistics are correspondingly overstated.

Measured properly, with regulation-driven cost increases included, 2019 may not have been the year of Peak Productivity. In the United States, it may have been 1995, the last year in which fiscal and monetary policies were competent, or even 1973, the last year before the regulatory blight descended — certainly, if you wanted to build a large infrastructure project, you could have done so far more cheaply back then. The only genuine and sustained increase in productivity in human history (as distinct from mere output, feeding more mouths at the same miserable level) was the Industrial Revolution. However, the policies that produced that have nearly all been reversed – so it is not surprising that we have entered an era of accelerating decay.

(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.)