The Next Productivity Boost

"What an economy really wants, after all, is not more investment per se but better investment.  It wants capital to flow to companies that will create value - not in the form of a rising stock price but in the form of more goods for less cost, more jobs and rising wages - by enhancing productivity." - James Surowiecki

Productivity is another interesting economic input.  To create a product you need materials, a plant and labor.  The number of products produced for a unit of labor is referred to as productivity.  Throughout history there have been major leaps in productivity from the railroad to the Ford manufacturing methodology to the Internet.  Each of these has fueled growth and created huge wealth for the innovators.  Furthermore there is a body of consensus that points to increases in productivity providing job growth and wage increases, both of which are desperately needed today.  So is there another productivity miracle in the works and will it be the golden spoon that pulls the global economy out of its quagmire?

Looking at the last 50 years there have been major leaps in productivity each decade other than the most recent one.  This is leading economists to predict that another one is just around the corner however the problem with leaps in productivity is that you never know when it will arrive or where it will come from.  Certainly there is more and more money being spent on research and development globally but it is hard to imagine that we will ever see something as impactful as what was witnessed with the creation of the Internet.  That said we have witnessed the birth of three dimensional printing that is allowing companies to develop products far more quickly than ever before.  On top of that as the price of the printers has dropped significantly more and more people have access to these machines and they are able to tinker away at product development in the comfort of their homes.  While this is a great new technology it is hard to imagine it having the productivity impact of the Internet but it may result in the next productivity miracle being designed.

Another recent development has been Fracking.  This new technique for extracting oil and gas out of rocks has drawn a lot of skepticism from the environmentalists but it is changing the economic landscape as America is suddenly becoming an energy super power.  Once again though this innovation will not provide much in the way of a productivity benefit although it is having a marked impact to the employment numbers in the northern part of the United States.

So we do not know where the innovation will come from but it appears that we have not witnessed the next productivity wave we are only basing the expectation on historical data.  Now while I have no doubt that productivity will continue to improve I do have a question as to whether this will have any meaningful impact on unemployment.  In the past innovation that resulted in productivity gains resulted in increased employment opportunities and higher wages.  As factories became more efficient market share was taken from others and the home country benefited at the expense of others.  As I have mentioned before with the advent of the Internet the globe shrank metaphorically speaking as things could now easily be produced in countries with a comparative advantage (see previous blog on this topic).  The result of this was an export of jobs to places like China and India.  Those that managed to keep their skill set aligned with the changes benefited with higher wages but there was a large portion of the population that has since been made obsolete.

It is this portion of the population that is creating a drag on growth for the simple reason that the balance of the workforce has to make up for the lost wages and purchasing power of these individuals.  My contention is that when the next wave of productivity gains appears (and it will) we could see another spike in unemployment.  In fact we could be at a point in time where full employment in the United States is no longer 4% but has shifted to 6% or even 7%.  Printing more and more money to try to foster employment by businesses in this scenario is pointless as no matter how much money is thrown at the problem the result is still high unemployment numbers.  The only result is an ever burgeoning level of government debt and the problems that come with that.

Not that I believe that the way to get people to work is reducing productivity.  What will happen over time as productivity continues to improve is that the employment market will shift and workers will adapt to the changes.  This takes time and could take decades but the way to lower unemployment under this scenario is for the government to spend their money assisting people on retooling their skills to match the changes in the market place.  Instead, the Federal Reserve continues to believe that throwing money at banks will result in a trickle down effect that will eventually reach the out of work sector.  This is clearly not happening as improvements in productivity are giving businesses the ability to reduce their workforce while continuing to increase volume.

If the government and the Federal Reserve would take a long hard look at all the entitlements that reduce the desire to work and the stimulus and how it is being spent maybe they would see that a far better way to reduce unemployment is to spend money on innovation and retooling rather than blindly throwing money out the window.