I blogged last week on my favorite topic – that of productivity – with Politicians and Press are Not Fighting the Right Battle – Productivity Continues to Decline. In today’s US print edition of the Financial Times, there is a full page article called, “The Productivity Puzzle”. Correctly the article calls out:
“The rise of modern civilization rested on this trend: for each person to produce ever more”.
The article continues: “The productivity question is of the greatest possible consequence for the US economy, affecting everything from when interest rates should rise to where they should peak, from the sustainability of US debt to what is the wisest level of investment for every business in the country.”
The issue is explained in the article. For the most recent period US productivity has fallen, and this is a key element to understanding our economic situation. However, it is not that simple.
- How is productivity measured?
- Why is US productivity so important at this moment in time?
- Why can’t economists agree how to improve it?
- Why is it that politicians don’t agree on its importance?
Most measures of productivity concern how GDP per hour worked is measured. This brings in an external variable, GDP. That is an interesting variable in its own right. See my blog Book Review: GDP – A Brief but Affectionate History, by Diane Coyle, 2014. The point is that through history a sustainable and solid growth in productivity has led to a growing economy and a developing society. It has not always been positive for everyone I agree. But with such growth, many good things also happen. The issue that when that growth is missing, virtually nothing of a an economically positive nature is possible. Think of your household – you cannot live of debt forever. But this simple fact is missed by our politicians.
The originating factor that led to the growth in debt came about at Bretton Woods. When the US led the breakup of the link between the US dollar and gold, the US government was freed to create debt, period. From this point on, every government of any worthiness was able to promise to pay its own currency to pay for its debt. The US dollar was already the reserve currency by this time. I wrote a book review of this important book of the subject, copied below as I cannot seem to find out if I posted the book review previously:
Anyway, the article explores the different elements of productivity and growth, across labor and technology, and of course the role of innovation. My blog last week looked at the falling number of “start ups” that is a proxy, perhaps, for innovation. The bad news is that most of the signs are negative; less innovation; fewer start-ups, stagnant education system and so on. And from a growth perspective, restrictive employment laws (more so in other countries) and policies more focused on redistribution than growth. You cannot re-distribute your self out of a contracting pie. And a growing pie can help feed more folks, even of some gorge more than others. Anyway, well worth reading. And enough to get your blood boiling, hopefully then in search of entrepreneurial excitement!
Book Review: The Battle of Bretton Woods, Benn Steil, Princeton, 2013. One of the most exciting reads I have come across that captures economic and politicking of great import. During and after the end of WWII, two men supported by their respective economic teams (Harry White for the US, and John Maynard Keynes for Britain), ‘fought’ for supremacy of their ideas as the bankrupt British Empire fought for financial survivals as America was vying for global economic relevancy. Steil seems to capture the moment, with in depth background of the men, and preparation for the famous meeting. He looks at several countries and the roles they played, and follows through after the meeting to discuss and explore the results, failings, and consequences of the Bretton Woods agreement. The rub is that the gold standard had collapsed under the pressure brought to bear on sterling due to the costs of two world wars. The responsibility to police and progress global trade, assumed by the British admire, was expensive. The costs to keep Empire operational added to this charge. The facts were that by the end of WWII, Britain’s’ gold reserves were depleted, and debts galore were piling up. Britain could not simply print money since it has assumed, to the Empire, that the pound would remain at a fixed exchange rate as before the war. Any ‘quantitate easing’ of the day would thus lead to destabilizing of the currency and possibly a run. This would then become self-sustaining and a crash would follow. Only the glut of dollars and the loans that came with that currency could help. But the UK needed dollars to pay those loans and there were few assets let to sell. All to quickly Empire came crashing down (e.g. Suez debacle ’56, Cold War starting up so quickly, and numerous countries seeking independence). The book explains the founding goals of the IMF and the World Bank. It also exposes how the vision that White had sold at Bretton Woods never came about, primarily due to the speed of the Empires collapse and the new demands placed on America. The individual battles between Keyens and White are well worth reading; they explain so much that describes who we are today since the economies of the world we see today started for Bretton Woods. You need to read this boom if you have any interest in economics, global trade, or the US-UK relationship. 10 out of 10.