Reply #9: The Productivity Miracle and Other Myths and Fairy Tales

[54anickel]

http://www.gold-eagle.com/editorials_04/benson032704.html

Lately, so much has been made of the New Economy and the "miracle" of high productivity growth as a reason why inflation has remained so low. During this time, the Fed has run the easiest monetary policy since a Latin American country kicked off hyperinflation. Moreover, the talking heads on "CNN Bubble Vision" have become instant classical economic luminaries in their own shallow minds, fawning at the Fed Chairman and proclaiming his genius that the low rate of job growth is caused by this miracle.

We agree there is a connection between high productivity and the lack of job growth, but we also notice the destructive trends that are the root cause of high productivity. We are led to assume that new capital invested in American factories is so productive that we can have more productivity without additional labor. However, while superior capital investment does increase labor efficiency, the factors being measured in America have nothing to do with this cause of productivity. In this country, we could certainly have a policy guaranteeing that 70 percent to 80 percent of manufactured goods consumed in America are actually made in America. Such a policy would add over 6 million manufacturing jobs in the United States and another 10 million service jobs that support the high paying manufacturing jobs.

Sadly, the real causes of the productivity miracle are "purposely hidden in plain sight" while the Chairman of the Federal Reserve tells us to look the other way, and believe in fairy tales.

We noticed the first indication of something going horribly wrong when Greenspan went to Capitol Hill for his annual testimony. On the first day, he went to the Senate and praised productivity growth. On the next day, he immediately went back to tell the House that retired workers on social security should not only not share in this productivity miracle, but they should work longer and harder and receive less benefits! Surely, we should have expected that he would be urging Congress to increase, not decrease, the benefits to those receiving a pension!

In looking at the world as it really is (and not what our government and Fed officials would like us to believe it is), at least two-thirds of productivity growth comes from the convenient ways that productivity is actually measured.

The first big con is measuring the investment in computer-type equipment. Because computers are running faster, the Bureau of Labor Statistics, "BLS", claims their prices, and that of other technology related goods, have fallen. In addition, because we have bought so much more in the way of technology, such as computers and cell phones, this factor not only pulls down the CPI and Price Deflator in the GDP, but it accounts for a large fraction of growth in the GDP. While the same amount of dollars are being spent on things like computers, the price for the same amount of computing power, speed and disk storage, is dropping like a stone. Pushing inflation down, by definition, forces production up which moves productivity upward.

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