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Out of the Crisis
A dead thing goes with the stream,
but only a living thing can go against
it.
—
G.K. Chesterton
The quality of imagination is to flow,
and not to freeze.
—
R.W. Emerson
In 2004, I
published a paper in the journal Cost Management that I named,
The Unfreezing of America. In it, I described how the focus on
taking out the variation in processes and products had frozen the
productive apparatus of this country and driven productivity
improvement, which requires variation, to very low levels. This was the
main problem for the real economy since this focus
produced lower growth, lower wages, and the threat of
stagflation (stagnation and
inflation occurring at the same time).
The real
economy had become frozen, over a long period, with global
growth dropping from 9.02% per year from 1950–1973 to 3.93% per year
from 1995–2007. U.S. economic growth fell from an average 3.79% per
year from 1946–1973 to 2.84% for the 1973–1995 period, and it will
become very low or negative this year. The reduction in growth and
productivity was the main reason people shifted to debt financing, as
income growth slowed as a consequence of declining annual productivity
improvements. Bankers were ready with new debt instruments that made the
financing easy, but their customers were dependent on asset prices
increasing, thereby making us a nation of speculators — in housing, in
stocks and in new derivatives of uncertain value.
The robust growth
that occurred when productivity was at high levels created expectations
that could not be met when productivity improvements dropped to much
lower levels. Hence, household debt increased 13 times between 1973 and
2007, government debt increased 20 times, income grew less than two
times, and savings rates fell below zero. Easy credit had created
wealth out of thin air that could not be sustained when deleveraging set
in and asset prices tumbled. And the credit crisis of 2008 arrived.
The U.S now had two
frozen economies — a real economy with growing unemployment and
shrinking growth; and a monetary economy with frozen credit, asset
values in free fall, and the threat of further bank and institutional
failures.
Does anyone think
that this would have happened if we had focused on productivity?
It becomes
painfully clear that the real economy’s lack of growth, causing the
speculative shift to debt financing, was the primary cause of the
collapse of the monetary economy. Even a growth rate of 5% per year
would have given us a GDP of $44 trillion rather than the $14 trillion
we have today.
More importantly,
can the real economy restore sanity to the monetary economy?
First we need to
determine what it is that we desire for the real economy. Is it solid
growth? Increased employment? Stable, or falling, prices? Rising
incomes?
Productivity
improvement can cause all that to happen at the same time. In my 2004
article, I showed that the frozen companies shrank employment by 6%
during the six years of the study, whereas highly productivity companies
expanded employment by 47%.
Silicon Valley
computer manufacturing created the
most highly paid work force in the world It created billionaire owners
and falling prices. And it was all due to a phenomenal 12.85% average
productivity improvement per year over 20 years.
How did they do
it? They decided to increase capacity (speed, storage) by 100% over
cycles that lasted only 18 to 24 months (Moore’s Law).
Kathryn
Studwell, an economic development economist who knows
Silicon Valley well, wrote to me after a preview of this
column:
More precisely, they were risk-takers, they were
networkers and they were collegial rather than protective when it came
to research — all of which reduced the time needed for innovation. The
LINKAGES between capital and ideas were less convoluted more free
flowing. WWII military-industrial complex profits allowed for
risk-taking with extra capital. Collegial relationships between
Stanford academics and industry speeded up innovation and
commercialization of ideas. Limits on networking so pervasive on East
Coast didn’t exist to the same extent in less-rigid Silicon Valley.
Would this work in
other industries? Why not? I have never worked in a place where
productivity could not be increased by 300% or more, and in 18 to 24
months. That is better than Silicon Valley.
Kathryn Studwell
comments, “Other industries are limited only by cultural norms that
discourage risk-taking, discourage networking and discourage sharing of
research.”
But we can learn.
We can learn from Silicon Valley, we can learn and apply the principles
that drive performance in all human activities, and we can learn from
the experience in other countries far ahead of us in annual productivity
improvement.
David Emery, a
professor of economics at St. Olaf College in Northfield, Minnesota,
wrote: “Your numbers are staggering, which is the point you are trying
to make. I suspect that deep down, most of us can’t believe that this
is really possible. It is sort of like winning the lottery — it is
possible, but … You are in a position of a coach on a losing team: You
need to convince us that it is possible for us to win—for the nation to
become as productive as you believe possible.”
Could we replicate
what Silicon Valley does in other industries?
In the projects we
worked on over the last 35 years the productivity focus succeeded every
time. In three countries —Indonesia, Malaysia and Sweden — World
Productivity Congresses were directed towards the specific challenges of
each country. Some of the brightest minds in the world converged on
Jakarta, Kuala Lumpur and Stockholm, and presented their analyses of
what would best help productivity and growth. The average 5-year growth
rates before and after these congresses were calculated. The increase
in average growth rate for the three countries was 113.5%.
And the number of
jobs increased dramatically.
People don’t lose
jobs because they are too productive. They lose jobs because they are
not productive enough.
Brian Riedl writes
on the Opinion page of The Wall Street Journal:
In reality, economic growth—the act of
producing more goods and services—can be accomplished only by making
American workers more productive. Productivity growth requires a
motivated and educated work force, sufficient levels of capital
equipment and technology, a solid infrastructure, and a legal system and
rule of law sufficient to enforce contracts.[1]
Why aren’t
investors investing? There is a prodigious amount of cash in the
economy. The availability of money is not the problem.
What exactly is the problem?
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If you were blessed
with a large cash hoard, would you
invest?
Investors seek out
companies that show promising growth: In other
words, companies with increasing productivity.
Investors don’t much care where these companies are
located. Right now the US economy does not tempt
investors. But China’s economy might.
We are beginning to
see the contours of the kind of economy that will
emerge from a productivity-focused strategy — that
is, if we decide to have one for this country:
-
The high costs
of fossil fuels in the future will produce
100-miles-per-gallon cars, children who will
become fit and healthy walking to school, and
alternative energy sources that will save
trillions of dollars.
-
Having priced
themselves out of reach for ordinary Americans
today, health care and education will have to
change. We shall see new forms of education
using information technology in different and
innovative ways; and we shall see health care
shifting to preventive care, “focused factories”
of specialty care, and work place clinics. We
shall see massive increases in patients seeking
care in countries like India and Thailand.
Insurers will fully reimburse both travel and
care expenses since they stand to save 10% to
90% of the cost of doing equivalent procedures
in the U.S. What does this signal to a health
sector that has produced negative
productivity every year over the last three
decades?
-
Businesses will
learn to compete globally, marshal Yankee
ingenuity and innovation, and use productivity
to pay high wages and still reduce
prices.
-
To accomplish
this quickly requires vision and leadership. And
it requires bipartisan support to resolve the
current economic challenge that, if properly
addressed, will benefit everyone.
-
The monetary
economy will then revert to its primary purpose:
To supply the credit that is needed for an
expanding economy.
Productivity
improvement will do the rest, and we need
everyone in the country to learn and understand how
new value is created.
Everyone.
This is not a
problem. This is the solution. Silicon Valley knows
how to do it. So do China, Singapore and, rapidly
joining them, India. We all need to understand how
new value is created and then do it!
I just returned from
addressing the 15th World Productivity
Congress in South Africa. I chose to demonstrate
how 300% productivity improvement may be achieved in
a number of different ways, and I was just informed
that this approach is being studied as the
productivity strategy for that very challenged
country.
Nothing would please
me more. Africa is just beginning to make fully
productive use of her richest and most abundant
resource — her own people.
The cradle of humanity lay
only a short distance from where the Congress was
convened. Having our human origins so close served
to remind us that, in a sense, we all are Africans
in a world wide Diaspora — our gains in distant
places are Africa’s loss.
One and a half
million years ago, man lit the first fire in a cave
in South Africa. Today that country is a
constitutional democracy, and it just performed a
peaceful transition of power while the 15th
World Productivity Congress was in session. Through
it all, we all felt safe, and we all admired the
majestic and solemn exercise of constitutional
succession. The future appears bright and promising,
and the new leadership is committed to invest in
their own people to unleash their creativity, their
talents, and their contribution for a future they
will own. And yes, the South African Center
for Productivity Expertise, Productivity South
Africa, is working in the classrooms, in the shacks,
among the budding entrepreneurs, in the sleek office
buildings of Johannesburg and Cape Town and in the
factories of Durban, to lift the productive
contribution of every man, woman and child in that
rich and ancient country.
Are they succeeding?
Here is a letter
from Rogers Dhliwayo, Chief Economist at the Center,
to Dr. Johan Smuts, Senior Productivity Advisor,
commenting on the presentation I made to the 15th
World Productivity Congress last month:
The paper
raises four distinct productivity effects, namely,
·
[Productivity improvement] increases wages.
·
[Productivity improvement] reduces prices.
·
[Productivity improvement] increases output.
·
[Productivity improvement] increases profits.
No other
strategy accomplishes all these objectives at the
same time.
The South
African experience from 2004 to 2007 appears to
vindicate this. From 2004 economic growth picked up
substantially in the South African economy. The
acceleration came about due to:
·
An increase
in total factor productivity from 2.9% for the
period 1995-2003 to 3.8 % from 2004-05.
·
An increase
in employment from 1.4% in the period 1995-2003 to
3.3% during 2004-2007.
·
An increase
in investment by an average of 10.6% per year
compared to 3 % in the earlier period.
This welcome
acceleration of economic growth and productivity was
accompanied by low inflation and interest rates.
Most of the
points raised in this paper are quite relevant to
the South African’s experience drive the point home
of the need to ratchet up productivity in the South
African economy.
Maybe we should pay
attention to Chief Economist Dhliwayo who is at the
front lines fighting far greater problems than we
have. It appears that he is succeeding.
So can we.
There are many
things the monetary economy can do to help, or
hinder, the growth of the real economy. But it is
the real economy that must do the job.
Next we shall see
how the real economy may best be restored and
expanded.
[1] Riedl, Brian. Why
Spending Stimulus Plans Fail. The
Wall Street Journal. November 14, 2008.
A15.
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