Paying the Piper
Productivity growth is the single
most important
factor affecting our economic
wellbeing.
—
Paul Krugman,
2008 Nobel Laureate in
Economics
The Japanese proposed a concept
during the Quality Revolution that has proved durable: The Five Whys.
The idea is that in order to correct
a problem, you have to know its root cause — or causes.
To ask only once why
there is a problem will at best bring you to its proximate cause. You
will then need to ask a second “Why?” to determine if that would bring
you closer to the root cause. The Japanese thought that Five Whys would
be likely to bring you there, and the test of whether you had found the
root cause was whether the original problem would be solved if you
corrected that particular root cause.
Here is a possible scenario for the
Five Whys when the question is, “Why do we have a credit crisis?”
Answer #1: Subprime loans were
offered to borrowers who were not credit worthy.
Why?
Answer #2: So that people who could normally not afford to buy
houses would be able to do so.
Why?
Answer #3: The incomes of would-be
home buyers were nor sufficient to meet conventional credit standards.
Why?
Answer #4: Wages had ceased to grow.
Why?
Answer #5: The productivity of
America’s work force had stagnated.
Now, let us administer the acid
test: If the U.S. GDP growth rate had been higher — say, 5 % per year —
would we have avoided the credit crisis?
The Nixon Recession in 1973 is one of
the milestone events economists look to when they study changes in the
productivity trend of this nation. That is when the productivity of the
American economy fell precipitously, since then averaging only .9% per
year until 1995, when it recovered briefly.
Here is what our current GDP is in
today’s money:
$13.8 trillion
Here is what it would have been had the U.S. economy grown by 5% per
year since 1973:
$44.3 trillion
Per capita income today at GDP of
$13.8 trillion:
$45,695
Per capita income today were the U.S.
GDP $44.3 trillion:
$146,689
We may conclude that a housing crisis
would have been unlikely had today’s per capita income been 321% higher
than it is today.
But, wouldn’t prices
have increased to offset the income increase?
The answer is,
“No.” Remember, everyone has
increased his/her productivity[1]:
People working in construction, health, education,
and all the other sectors of the economy.
Productivity growth is known to lower prices in a
competitive economy.[2]
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What about the
national debt?
We could have paid
off the entire $10 trillion debt and still have had
a GDP of at least $34.3 trillion and a per capita
income of $113,576 — 248.6% higher than what we
currently enjoy.
What about federal
deficits?
Assuming tax rates
remained unchanged, tax revenues will have been at
least 321% higher than they were over the period.
That would have made deficit funding unnecessary.
In addition, tax revenues would have provided the
funds to pay for all the currently mandated programs
now in jeopardy — including Social Security,
Medicare and Medicaid.
How did Americans fund their
purchases between 1973 and today without significant
growth in GDP?
By the use of
debt financing.
Real income in
the U.S. increased 1.86 times between 1972 and
2007.
Private
household debt increased 13.15 times, and
government debt increased 20.67 times.
Up until 1973,
Americans’ expectations had not outpaced their
incomes. Household debt was 5.46% of the GDP;
in 2007, it was 27%. Between 1973 and 2007,
U.S. government debt skyrocketed from 11.12% to
86.98% of the national GDP. In 1973, $1 in debt
helped create $6 in GDP. In 2007 $1 in debt
helped create only $1 in GDP. Less and less of
the debt over time seems to be used for
productive purposes.
In 1973, the
personal U.S. savings rate was 13.9% of
disposable income; by 2005, it had become a
negative 2.9%. Since then, the savings rate
has increased, but barely — from a negative 1.7%
in 2006 to a positive 1.6% in 2007.
At 70%, private
consumption is the largest part of the U.S.
GDP. In the first quarter of 2008, private
consumption increased by only 0.9%. Under
staggering debt and with little or no savings
left, the party was over for the American
consumer.
And the credit
crisis of 2008 arrived.
Let’s summarize:
Over the last 35
years, Americans engaged in a spending spree of
historic and unsustainable proportions. This
spending binge embraced both private and public
spending, and is the root cause of the credit
crisis that we have today. Eventually, the
Piper must be paid, and the U.S. is facing a
correction that will wipe out debt, savings,
financial investments, and lower the values of
assets to the point where incomes again will be
in sustainable relationships to debts, both
public and private. This correction can come
about in either of two ways — either through a
deep and prolonged recession, or by a dramatic
and sustainable increase in the nation’s real
GDP. The latter strategy means lifting the
productive contribution of every individual in
this nation to a level that will return the U.S.
to its place in the world as the leader in
value-added per person and make most of the
correction we are now facing unnecessary.
If a 5%
productivity improvement per year could have
prevented the credit crisis, it is reasonable to
assume that it could also repair the current
crisis, and perhaps even prevent future crises.
In the next
column, I shall discuss how productivity
improvements can be accomplished quickly and
effectively in all sectors of the economy.
Productivity
improvement should be the key focus of the new
President. It will address and resolve
virtually all the economic problems we are
experiencing today as well as into the near
future.
[1] In the U.S.,
productivity growth would constitute about
4% of the 5% growth rate in GDP.
[2] Jean Baptiste Say, a
contemporary of Adam Smith, observed that to
break the back of a recession, prices must
go down and wages must go up so people can
afford new purchases, and profits must
increase so investors will want to invest.
Productivity improvement is the only
strategy that will achieve all these
objectives at the same time.
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