My thing is productivity. Productivity is the result of a number of factors and policies, and is what delivers to the recipient the opportunity to experience something now that was not possible in the past – growth, prosperity, and the right to help others. The Industrial Revolution was an exclamation mark on the impact of increased productivity. Increasing productivity means we get more for less; decreasing productivity means we get less for the same, or more. History shows us that no nation of any flag or color has organically grown sustainably without productivity improvements. Yet this simple fact is sidelined today by politicians that are more interested in their own welfare and pet projects.
I read today’s print edition of the US Wall Street Journal over breakfast and it alarmed me. This happens every now and then – here is a blog on productivity and IT I did: What do we do with IT if we can no longer increase productivity. So here is a recap of the articles I spied as I munched on my granola:
- Steeper Drop for U.S. Economy – Q1 GDP, previously reported as a decline of 1%, was restated as a decline of 2.9%. It seems most economists accept that the largest part of this drop is not likely to persist in later periods, and that it was more a “bad luck” confluence of issues. In the article however is a little point that for me stood out: it seems the previous quarters’ had included an increase in inventories, and Q1 was the period where the inventories were being drawn down. In previous questers this means firms spent more to put inventory on the shelf in the belief they will sell them later. This means GDP is reportedly higher – though that inventory has not been sold and so profits have not yet been realized. In Q1 those inventories were drawn down which means firms slowed production (lowering GDP) as sales consumed inventory that was not (yet) replaced. The idea is that as inventories draw down, firms will eventually ramp up production and thus GDP “recovers” in a later quarter. The question though is will consumer spend continue to grow; and why did inventory building ramp up faster or ahead of muted consumer demand? This is classic Supply Chain 101 stuff.
- Behind the Productivity Plunge: Few Startups – This “Opinion” piece is central to a point that has been explored by my colleague at work, Jorge Lopez. Ignore the human element for a moment, and just think of firms as agents; also, imagine that we were just starting up the first ever firm. In one year 10 firms might startup. A year later, 15 more startup. In that second year, 2 of the first 10 fail – leaving 23 total firms in business. The third year, 20 firms startup, 3 from the first 10 die out, and 4 from the second year also. The running total of active firms at the end of the 3rd year is 36. Some of these firms will have grown well, some less so. No just think forward – and you can see how firms come and go. Over time large firms emerge; acquisitions take place and so on. The size of the firm (and the theory underpinning that) is critical in determining how many firms result, and the most efficient/economically speaking those firms should be. The rate of birth is one of the most important factors in the ongoing survivability of the economy. As the number of startups decline, there are fewer minnows to be gobbled up by larger firms; and there are fewer opportunities for smaller firms to grow into larger firms. It is a bit like being told by the doctor that the rate at which your body is refreshing its skin layers is declining. The end is not likely to be good.
- General Mills to Cut Costs – A reported sale drop at a household staple is never good news. Worse, the drop is significant enough the firm has to announce a cost cutting effort. Given the last 8 years it must be hard – even chilling – to hear such news. How much more flesh is left on the bone to cut? Do firms have that much left over after the last recession? If firms cannot improve productivity, and they already have cut much if not all the fat, the next cut has to be bone. Productivity does not equate to “keeping people hired”, but it does mean a firm can improve its prospects, and with those prospects are the chance that in a later cycle, employment could be improved.
So back to the point – if we don’t focus on productivity we are not focusing on how we, as a single organism, will survive in the future. By not making this the focal point of economic policy we run the risk of promoting individual sectors, one at a time, at the expense of the whole. This is akin to using analytics to drive departmental behavior and not taking into account of how independent analytics can create local optimization as opposed to system-wide optimization.
Here is a Conference Board report from January regarding the global slowdown in productivity.
We HAVE to focus on improving productivity. There is no alternative. Thoughts?