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By George P. Brockway, originally published May 19, 1993

1993-5-19 Why Productivity Will Unto Clintonomics title

THE FIRST COLUMN in this series, almost 12 years ago, was titled “Why Speculation Will Undo Reaganomics” (NL, September 7, 1981). Well, I was wrong. I was right enough in my analysis – that speculation would enrich the rich and impoverish the poor and bring on what we now call a credit crunch – but I naively could not imagine anyone being pleased with such an outcome. By last November, of course, a considerable majority of the voters did become displeased, if not with the enrichment of the rich and the impoverishment of the poor, at least with the stagnation that followed from the polarization of the economy.

I now feel possessed of another prophecy. And I hope I’m wrong again.

When I say productivity will undo Clintonomics, I mean just that. I don’t mean lack of productivity. I mean what the New York Times and the Wall Street Journal and the Economist are always writing about, what Nobel laureates in economics from MIT are always talking about, what Labor Secretary Robert Reich is now planning to try to increase. I mean that to the extent that Clintonomics is successful in improving our productivity, it will fail to improve our standard of living.

If our aim is what all these worthies say it should be, we can achieve it by decreasing production, profits, employment and wages. In fact, this is what General Motors and IBM and other giants of our economy are doing today. The fashionable word for their activity is downsizing, and the purpose is to step up productivity. Given a modicum of managerial skill and luck, half of the downsized corporations may actually improve their rating on the productivity scale. But their production and profits and employment and wages will mostly be lower. And the national product and profits and employment and labor income will certainly be lower.

Productivity is not a new idea. It was an old idea when President Reagan, in his first year in office, created a 33-member National Productivity Advisory Committee headed by former Treasury Secretary William E. Simon. You never heard of that committee? Who ever did? A year or so after its appointment I spent some time trying to find out what it had accomplished. Although I wrote as CEO of an American corporation, Simon did not answer my inquiries, nor did the White House. Finally, Senator Daniel Patrick Moynihan was able to dig up for me three or four slim pamphlets published by a second productivity committee that had been created some months after the initial one. I still have the pamphlets somewhere in this mess I call my study. As I recall them, they were paeans to efficiency and might well have been written by Frederick Winslow Taylor a hundred years earlier.

When economists started playing with productivity they changed it radically. They defined it clearly enough as output per unit of input. In keeping with their passion for mathematics, though, they devised an equation to determine it and an index to rank performance. Since labor is by far the largest factor of input, they thought to simplify the equation by letting labor stand for all inputs. This had the further attraction of allowing them to quantify input in “real” rather than dollars-and-cents terms, as they would have had to do in order to add the input of labor to the inputs of land, capital, technology, and whatever other factors one might name. Mathematical economists tend to believe that money is not real and don’t like to talk about it in public, but their simplification, as I’ve shown in greater detail elsewhere (see The End of Economic Man, Revised–Adv.), causes a serious distortion.

The productivity equation relates two quantities. It is a ratio, an ordinary fraction. In the United States it is computed by the Bureau of Labor Statistics of the Department of Labor, which divides the gross domestic product of a period by the number of hours worked in the period. “Hours worked” includes those of proprietors, unpaid family members and others “engaged” in any business.

Like all simple fractions, this one can be increased in the two ways we learned in grade school: by increasing the numerator (2/3 is greater than 1/3), or by decreasing the denominator (1/2 is also greater than 1/3)[1]. Given this property of fractions, a moment’s reflection will satisfy you that the productivity index is constitutionally incapable of providing an unequivocal answer to any question you may reasonably want to ask. It tells nothing of the size or nature of the domestic product, and nothing of the size, composition or compensation of the labor force.

The index goes up when production fails, provided “hours worked” falls faster; that is what the downsizing movement aims for. The other name for this result is recession, or depression. On the other hand, the index declines when production rises, provided “hours worked” rises faster. The other name for this result is nonsense. The economy is not less prosperous, nor is the nation weaker, because more people are working. (Otherwise, why are we so eager to get welfare mothers to work?)

The foregoing is obvious, and the mathematics is indefeasible. How is it, then, that so many intelligent, experienced, well-intentioned men and women –practically the entire membership of the American Economic Association, not to mention the with-it managements of our corporations great and small – are bemused by the productivity delusion? Psychology aside, I can make a stab at explanation.

Let’s begin with a quotation from a back issue of the Times: “A worker who produces 100 widgets an hour is clearly more productive than a worker who produces only 50 widgets an hour.” That is certainly true. And generalizing the observation, a nation of 100-widget-an-hour workers should be twice as prosperous as a nation of equal size composed of 50-widget-an-hour workers. True again – with one proviso, namely that both nations have full employment[2]. Should the first nation have only a third of its workers employed, while the second has full employment, the second will produce 50 per cent more widgets than the first and therefore will be more prosperous.

The assumption of full employment is one that economists are so comfortable with that they make it routinely, without thinking about it. Indeed, classical economics was based on this assumption, and so is neoclassical, or the economics currently practiced by most of the profession.

The beauty of full employment is that if you have it, almost anything you try will work. David Ricardo thought that England should stop making wine and concentrate on wool cloth, that Portugal should do the opposite, and that the two countries should exchange surpluses. The English vintners would become weavers, and so on. Given some rather special assumptions, this was a dandy idea in 1817 (and today it underlies the North American Free Trade Agreement). A better idea, because the British Isles were plagued by roving bands of homeless unemployed, would have been to employ the unemployed as vintners (or brewers or barley-water bottlers) and let the Portuguese keep their port, along with the wool they were perfectly capable of weaving.

If you have full employment, you can (and should) invest almost without limit to upgrade your product and upgrade the workers and capital plant that produce it. If you have millions of men and women who are unemployed or underemployed, you need to increase the number of hours worked. It doesn’t make much sense for the nation to train these people for jobs in industries that don’t exist, or that we can only imagine, to satisfy the presumed demands of a hypothetical global economy.

The new global economy is a hot ticket today. In the sense that we have one, however, there has almost always been one. Archaeologists now claim that the fabled Silk Route is two or three millennia older than Marco Polo thought. But the economic impact of the route was slight in prehistoric times, and at present the economic impact on us of Bombay and Cairo and Mexico City does not extend much beyond our corporations exploiting their labor in order to undercut our wage rates.

Unemployment is our problem. Adding up those who are officially called unemployed, those too discouraged to look for work, those too turned-off to think of working, and those able to find only occasional part-time work, recent testimony before a Congressional committee reached the appalling total of 17.3 million men and women. If we followed Mexican practice and counted as employed everyone who as much as cadged a tip for opening a car door last week, our unemployment total would be as low as the 2 per cent Mexico reports. Or if we followed mainstream economic practice and did not count at all the “naturally” unemployed, we could squinch our eyes shut and pretend that the problem didn’t exist (see “Are You Naturally Unemployed?” NL, August 10-24, 1992).

It exists, nevertheless. It really and truly exists, and as long as our best brains are trying desperately to reduce “hours worked,” it will not go away. Clintonomics may cauterize a few hundred malignant polyps at the top of our income distribution, and that will be all to the good. It may find suitable work for a few thousand middle managers rendered redundant by corporate or governmental downsizing, and that will be to the good. But unemployment will not be substantially reduced (except by the withdrawal of people from the official labor force), aggregate consumption will not be substantially increased, and whatever brave new hi-tech industries are created will stagnate for lack of consumers, here or abroad, able to buy their products.

These dismal outcomes will no doubt be exacerbated by the eagerness of Congress, whipped to a frenzy by Citizen Ross Perot, to cut government expenditures, and by the complementary unwillingness to fund the President’s already inadequate stimulus program. But all that aside, a mad drive for “productivity” in the face of long-lasting unemployment is fully sufficient to undo Clintonomics.

I hope I’m wrong, for I joined in the grateful cheering during the State of the Union address.

The New Leader

[1] Ed: Reminds me of seeing a colleague trying to explain some numerical analysis in a peer review session, a Friday Afternoon Seminar, and failing. Finally our founder stood up and said, “Well, that’s the trouble with ratios… They have a numerator and a denominator.”  He then walked off…

[2] Ed: Loyal readers will recall that the author does not believe in NAIRU, the natural rate of unemployment.

Originally published February 28, 1982

The Dismal Science

PRODUCTIVITY:
THE NEW
SHELL GAME

BY GEORGE P. BROCKWAY

WE HAVE a new economic sport in town. Oskar Morgensterns theory of games has been with us for decades.  Comparatively recently, Lester C. Thurow gave us his pretended zero-sum game. Now President Reagan has created a 33-member National Productivity Advisory Committee headed by former Treasury Secretary William Simon. The committee has not yet announced the rules for its planned year-long study, but I have no hesitation in telling you that it will result in the additional refinement of a modernized shell game that has been played informally ever since the present inflation started. In this extraordinary contest there is a pea under every shell-yet you and I always lose.

The shells, all identical of course, are made of a statistic devised by eminently respectable economists. It is called the Productivity Index, an apparently innocent and objective figure obtained by dividing the Gross National Product of a period (usually three months or a year) by the total number of man-hours worked in the period. If I had not promised to try to refrain from grousing about how the GNP is compiled, I’d say the Productivity Index is what you get when you divide a grossly misleading estimate by another that is merely an educated guess. Even those who calculate it will admit that its ostensible precision is spurious, and that at best it may sometimes be useful in comparing one period with another. As the automobile advertisements put it, “Your mileage results may be different.” Indeed.

The vice of the Productivity Index, though, is not that it is an estimate based on estimates (thus multiplying their unreliability). The vice is that it does not measure-and cannot measure what its users pretend it measures.

Let’s go back a bit. We learned in school-perhaps from one of the academic experts on the President’s new committee-that the factors of production are land, labor and capital. Some add technology to the list, and others add an array of propensities to do this, that or the other. No matter. The point is that regardless of how many items you have on your list, labor is only one of them. Consequently, dividing the GNP by the number of hours worked to determine productivity is like using the average number of yards gained per first down to decide the winner of a football game. You might do that if you were Howard Cosell, but not otherwise.

If one persists in using only “hours worked” to arrive at the Productivity Index-as we can be pretty sure the President’s committee will-one is in effect declaring that the contributions of land and capital are negligible. They don’t have to be counted, because they count for nothing. Any way you look at it, that’s going to be pretty funny talk coming from a committee that is as conservative as the President dares make it-and he’s a brave man. I will tell you straight out that I am something of an old-fashioned entrepreneur, and you’ll never catch me saying anything like that. In fact, you’re not likely to convince me that the interest rate-to name only one other factor-has nothing to do with productivity.

Well, despite the reservations we may have, that’s what the shells in this game are like. Now let’s examine some of the peas that have been used in the informal games we’ve seen of late; we’re odds-on to see them again.

The first pea is an all-purpose variety that always turns up on metropolitan bars and suburban bridge tables: No matter where you look, it just seems that people aren’t willing to work the way they used to. This is what the Productivity Index seems to show, and it certainly seems plausible, remembering how hard you and I used to work when we were young. In the old days we didn’t have coffee breaks and extended vacations and … No doubt you can think of examples as well as I can. This part of the game is just a warm-up, to get everyone in the proper mood.

The next pea is more serious. It is the America-has-gone-soft pea. We let them beat us in Vietnam (or beat ourselves); investigative journalism got out of hand over Watergate; and now a court has said that creationism isn’t science. It’s hard to tell what the country stands for anymore. Moreover, since there’s too much money chasing too few goods’, it’s no wonder that productivity is down and we have to have this recession to get us back on the track. (You may think it odd that a recession, which is defined as fall In Gross National Product, could be a way of increasing productivity. But let that pass.)

Under the third shell there is the archaic-industry pea. The industry in question is usually important in the military-industrial complex, so our role as leader of the free world is said to be at stake. The afflicted industry is unhappily mature, obsolete, decrepit, and hence unable to compete with the newer, more modern, more efficient plants that the Germans and Japanese had to build because we blew up their old ones in the War. Although this is certainly an ironic state of affairs-that being blown up is good for you-we intellectuals have learned to live with irony and actually find it more to our taste than simplicity. (I seem to remember that the British were heavily bombed, too; yet their factories are said to be even worse than ours. Nor does bombing seem to have been a great blessing to the French on one side, or to the Italians on the other. But let that pass.)

At any rate, we’ve been hearing that U.S. Steel made a bad mistake in staying with the Bessemer process instead of switching to whatever it was the Germans and Japanese switched to, and that therefore it needs protection from foreign competition. (Steel’s mistake would seem to have been a mistake on the part of management, though it isn’t nice to point. I wonder why bankers who deplore that mistake are so eager to underwrite the same management in its takeover of Marathon Oil. It is surely a very pretty irony that botching the steel business fits you for success in the oil business. And it does raise questions about how difficult it can be to run an oil company, and what can possibly justify the $1 million annual salary of Mobil’s president. But let that pass, too.)

If you were not born yesterday, you can readily see that the America-has gone-soft pea can be used to justify not merely the recession but more particularly the recession’s effects in rising unemployment, lower wages and union busting generally. The archaic-industry pea can be used to justify fast write-offs for tax purposes and low capital-gains taxes to encourage what is called investment but is actually speculation (I’ve fussed about that before and no doubt will again). In other words, the   winner of the new shell game is always Reaganomics.

THERE’S NO WAY you and I can stand a chance here, unless we look again at the so-called Productivity Index. As we’ve noted, it is flawed macroeconomically by its failure to take account of such crucial factors as the interest rate. Microeconomically it overlooks the obvious fact that in any particular firm the efficiency of the labor force depends in large part on the skill and luck of the management. Where management decides to manufacture a product that turns out to be unsalable (say, a gas-guzzling automobile), the result tells us nothing about the efficiency of the production line. Similarly, a badly run production line will yield bad results no matter how hard the individual workers work.

More fundamentally, the Productivity Index is guilty of the fallacy of composition, which is the assumption that what is true of every member of a class is true of the class itself. Thus it is fallaciously said that since every firm is run to make a profit, the nation is run to make a profit. (This points, too, to the fundamental fallacy of Marx’s theory of surplus value, but we won’t go into that now.) In the case of the Productivity Index, the fallacy appears in the use of “hours worked” as its denominator.

The Productivity Index, let us remember, is a simple fraction, whose numerator is the GNP and whose denominator is “hours worked.” As with any fraction, the value of this one can be increased by increasing the numerator (two-thirds is greater than one-third), or by decreasing the denominator (one half is also greater than one-third). An individual firm can increase its profits (“productivity”) even in the face of declining sales, provided it can cut its labor costs still faster; and this is the course surviving firms take in a recession.

But transfer the same thinking to the economy as a whole and you are saying that the nation’s productivity can be improved (or the nation made stronger and wealthier, if that’s what you want to talk about) by deliberately-in cold blood- fixing it so that nine or 10 or 11 million potential workers don’t do any work. With the denominator decreased, the index should go up. This is absurd on its face and vicious in its results.

While recognizing the vicious absurdity of the Productivity Index, you may still want to measure the efficiency of the economy. There is a pretty good figure for doing that: the GNP per capita. This won’t show you why the economy is more or less efficient than it used to be (and, as I have suggested, I could tell you a tale about the GNP). Yet at least the term “per capita” includes us all; and we are all, employed and unemployed alike, members of the nation the” N” in GNP. Further, if you look at the GNP per capita you will see what common sense has already told you: that a deliberately induced recession what we have today-is stupidly and pointlessly cruel to millions of men, women and children, as well as destructive of the national interest.

The cruelties and absurdities of the Reaganomic shell game flow from the apparently innocent and objective Productivity Index that well-intentioned economists have devised. It has been observed before that the road to hell is paved with good intentions. We may not, I fear, be quite so sure of the intentions of the bankers and brokers and politicians who are hot for Reaganomics. In that case we might inquire what it is they produce that qualifies them to lecture the rest of us on productivity.

The New Leader

[Over a year later a letter was received regarding this article. That letter and George Brockway’s response are found here: http://wp.me/p2r2YP-5Q]

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