Tag: Productivity

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Productivity not population key to Aussie living standards | Macrobusiness

From Leith van Onselen at Macrobusiness:

Former ALP minister Craig Emerson has penned an article in The AFR calling on the Morrison Government to tackle Australia’s declining productivity growth, which is central to boosting the nation’s living standards:

“Productivity growth has contributed 95 per cent of the improvement in Australians’ material living standards since 1901”.
“From the turn of the century, Australia’s productivity performance began to slide and the longer it has gone on the worse it has gotten”.
“Over the period from 2015 until the COVID-19 pandemic struck, actual productivity growth was worse than the low-productivity scenario included in the 2015 intergenerational report”.
“In the decade since 2010 – even excluding last year – Australia recorded its slowest growth in GDP per capita of any decade in at least 60 years”.
“Without a comprehensive economic reform program, Australia will inevitably have weak growth in living standards during the remainder of the 2020s and into the 2030s”.

Craig Emerson’s assessment is broadly correct, as evidenced by the stagnant real per capita GDP, wage and income growth experienced over the past decade (even before the coronavirus pandemic).

Sadly, however, the Morrison Government with the help of the Australian Treasury seems hell bent on leveraging the other ‘P’ – population growth – to mask over Australia’s poor productivity performance and to keep headline GDP growing, even if it means per capita GDP, income growth and living standards deteriorate.

Rather than using the coronavirus pandemic as an opportunity to reset the Australian economy to focus on quality over quantity, the Morrison Government is intent on repeating the policy mistakes of the past by returning to the lazy dumb growth policy of hyper immigration.

Rebooting mass immigration will inevitably contribute to Australia’s poor productivity growth by:

  • Crush-loading cities, increasing congestion costs and rising infrastructure costs;
  • Encouraging growth in low productivity people-servicing industries and debt creation, rather than higher productivity tradables; and
  • Discouraging companies from innovating and adopting labour saving technologies.

It’s time to put the Australian Treasury’s Three-Ps framework to rest once and for all, along with the snake oil solution of mass immigration.

Policy makers must instead focus first and foremost on boosting productivity, followed by lifting labour force participation. These are the two Ps that actually matter for living standards.

We agree with the concern over poor productivity growth, but focusing on labor force participation is putting the cart before the horse. The key cause of low productivity growth is declining business investment.

Business Investment

Without business investment, new job creation and wages growth will remain low. The way out of this trap is to prime the pump. Boost consumption through infrastructure programs — investment in productive infrastructure that will boost GDP growth (to repay the debt). Boost business investment through strong consumption, a lower Australian Dollar and tax incentives (like accelerated write-off) for new investment.

The lower exchange rate is important to rectify a serious case of Dutch disease1 from the resources industry. There are only three ways to achieve this:

  1. Increase imports, which would be self-defeating, destroying jobs;
  2. Reduce exports; or
  3. Export capital, of which Australia has little.

China is doing its best to help us with the second option, by restricting imports of a wide variety of Australian resources, but that has so far achieved little. David Llewellyn-Smith came up with an interesting alternative:

If we accept that the CCP is the latest manifestation of the historical tendency to give rise to political evils intent on dominating the lives of freedom-loving humanity, then why don’t we cut the flow of iron ore right now…….

The results would be instant. The Chinese economy would be structurally shocked to its knees. 30% of its GDP is real estate-related. 60% of the iron ore that drives it is sourced in Australia. Roughly speaking that is 18% of Chinese GDP that would virtually collapse overnight. Vast tracts of industry would fall silent. An instant debt crisis would sweep the Chinese financial system as its bizarre daisy chain of corruption froze. Local governments likewise. Unemployment would skyrocket.

…..What we can say with confidence is that it would pre-occupy the CCP for many years and hobble it permanently. Its plans for regional domination would be set back decades if not be entirely over.

The problem is how to convince the old boys around the boardroom table at BHP that this would be in their interest as well as in the country’s interest.

Notes

  1. Dutch disease is a term coined by The Economist to describe the impact on the Netherlands’ economy of a resources boom from discovery of large natural gas fields in 1959. The soaring exchange rate, from LNG exports, caused a sharp contraction in the manufacturing sector which struggled to compete, in export markets and against imports in the domestic market, at the higher exchange rate.
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Corporate profits and employee compensation

Employee compensation as a percentage of net value added by nonfinancial corporations has been falling since its Dotcom peak in 2000 and is now approaching lows last witnessed in the 1960s. Both rising productivity, through technological advances, and offshoring of blue-collar jobs have contributed to the fall.

Net Value Added: Employee Compensation & Corporate Profits

Corporate profits (as a percentage of net value added by nonfinancial corporations) have shown a corresponding rise for the same period, demonstrating an inverse relationship over the last half-century. Rises and falls in both employment costs and corporate profits (as a percentage of net value added) are most likely attributable to fluctuations in output per employee (productivity) rather than fluctuating wage rates.

The question is: are rises in corporate profits and corresponding falls in employee compensation, as a percentage of net value added, sustainable? Is this time different, or are we likely to witness a peak followed by a sharp fall as in the 1960s? Productivity improvements through offshoring jobs are likely to continue for as long as the Dollar remains strong relative to Asian exporters. In other words, a very long time. Technological advances such as automation may also reduce employment costs per unit of output. But there is no clear answer as to how far profit margins will be eroded by increased competition from Europe and Asia. All we can do is monitor the relationship between employee compensation and net value added for nonfinancial corporations for clues. So far, there is no indication that the decline is reversing.

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Secular stagnation?

Economic recovery after the Great Recession has been disappointing.

Employment levels remain low. Official unemployment figures ignore the declining participation rate. Employment levels, in the 25 to 54 age group, for males remain roughly 6%, and females 5%, below their previous peaks. Using the 25 to 54 age group eliminates distortions from student levels and from baby boomers postponing retirement.

Employment levels

Manufacturing earnings, as would be expected, are also weak.

Manufacturing earnings

Sales growth remains poor.

Sales growth

And real GDP growth is slow.

Real GDP

US Headwinds

Stanley Fischer, Vice Chairman at the Fed, in his address to a conference in Sweden, attributed slow recovery in the US to three major aggregate demand headwinds:

The housing sector

The housing sector was at the epicenter of the U.S. financial crisis and recession and it continues to weigh on the recovery. After previous recessions, vigorous rebounds in housing activity have typically helped spur recoveries. In this episode, however, residential construction was held back by a large inventory of foreclosed and distressed properties and by tight credit conditions for construction loans and mortgages. Moreover, the wealth effect from the decline in housing prices, as well as the inability of many underwater households to take advantage of low interest rates to refinance their mortgages, may have reduced household demand for non-housing goods and services. Indeed, some researchers have argued that the failure to deal decisively with the housing problem seriously prolonged and deepened the crisis.

A slow housing recovery is unfortunately the price you pay for protecting the banks. By supporting house prices through artificial low interest rates, you prevent markets from clearing excess inventories.

Fiscal policy

The stance of U.S. fiscal policy in recent years constituted a significant drag on growth as the large budget deficit was reduced. Historically, fiscal policy has been a support during both recessions and recoveries. In part, this reflects the operation of automatic stabilizers, such as declines in tax revenues and increases in unemployment benefits, that tend to accompany a downturn in activity. In addition, discretionary fiscal policy actions typically boost growth in the years just after a recession. In the U.S., as well as in other countries — especially in Europe — fiscal policy was typically expansionary during the recent recession and early in the recovery, but discretionary fiscal policy shifted relatively fast from expansionary to contractionary as the recovery progressed.

Anemic exports

A third headwind slowing the U.S. recovery has been unexpectedly slow global growth, which reduced export demand. Over the past several years, a number of our key trading partners have suffered negative shocks. Some have been relatively short lived, including the collapse in Japanese growth following the tragic earthquake in 2011. Others look to be more structural, such as the stepdown in Chinese growth compared to its double digit pre-crisis pace. Most salient, not least for Sweden, has been the impact of the fiscal and financial situation in the euro area over the past few years.

Supply-side

Fischer also cites the weak labor market, declining investment and disappointing productivity growth as inhibiting aggregate production.

While I agree with his view of the labor market, we should not use the heady days of the Dotcom bubble as a benchmark for investment. Private nonresidential investment is recovering.

ASX 200 Corrections

Productivity is also growing.

Productivity

Other factors

There are two factors, however, that Fischer did not mention which, I believe, go a long way to explaining slow US growth.

Crude oil prices

In the last 4 decades, sharp rises in real crude oil prices have coincided with falling GDP growth and, in most cases, recessions. Crude prices remain elevated since the Great Recession and, I believe, are retarding economic growth. The blue line on the graph below plots crude oil (WTI) over the consumer price index (CPI).

WTI Crude

Currency manipulation

China continues its aggressive purchase of US Treasuries in order to maintain a competitive advantage of the Yuan against the Dollar. Inflows on capital account — not only from China — include roughly $5 trillion of federal debt purchased since 2001. This keeps the US uncompetitive in export markets and places domestic manufacturers at a disadvantage when competing against imports.

Foreign Holdings of US Federal Securities

Recent purchases of federal debt are sufficient to drive 10-Year Treasury yields through support at 2.40%/2.50%.

10-Year Treasury Yields

Glass half empty or half full?

Bears will no doubt seize on the headwinds to support their prediction of another market crash. I am reassured, however, that the economy has recovered as well as it has, given the difficulties it faces. None of the headwinds are likely to disappear any time soon, but progress in addressing these last two issues would go a long way to solving many of them.

Posted on

Secular stagnation?

Economic recovery after the Great Recession has been disappointing.

Employment levels remain low. Official unemployment figures ignore the declining participation rate. Employment levels, in the 25 to 54 age group, for males remain roughly 6%, and females 5%, below their previous peaks. Using the 25 to 54 age group eliminates distortions from student levels and from baby boomers postponing retirement.

Employment levels

Manufacturing earnings, as would be expected, are also weak.

Manufacturing earnings

Sales growth remains poor.

Sales growth

And real GDP growth is slow.

Real GDP

US Headwinds

Stanley Fischer, Vice Chairman at the Fed, in his address to a conference in Sweden, attributed slow recovery in the US to three major aggregate demand headwinds:

The housing sector

The housing sector was at the epicenter of the U.S. financial crisis and recession and it continues to weigh on the recovery. After previous recessions, vigorous rebounds in housing activity have typically helped spur recoveries. In this episode, however, residential construction was held back by a large inventory of foreclosed and distressed properties and by tight credit conditions for construction loans and mortgages. Moreover, the wealth effect from the decline in housing prices, as well as the inability of many underwater households to take advantage of low interest rates to refinance their mortgages, may have reduced household demand for non-housing goods and services. Indeed, some researchers have argued that the failure to deal decisively with the housing problem seriously prolonged and deepened the crisis.

A slow housing recovery is unfortunately the price you pay for protecting the banks. By supporting house prices through artificial low interest rates, you prevent markets from clearing excess inventories.

Fiscal policy

The stance of U.S. fiscal policy in recent years constituted a significant drag on growth as the large budget deficit was reduced. Historically, fiscal policy has been a support during both recessions and recoveries. In part, this reflects the operation of automatic stabilizers, such as declines in tax revenues and increases in unemployment benefits, that tend to accompany a downturn in activity. In addition, discretionary fiscal policy actions typically boost growth in the years just after a recession. In the U.S., as well as in other countries — especially in Europe — fiscal policy was typically expansionary during the recent recession and early in the recovery, but discretionary fiscal policy shifted relatively fast from expansionary to contractionary as the recovery progressed.

Anemic exports

A third headwind slowing the U.S. recovery has been unexpectedly slow global growth, which reduced export demand. Over the past several years, a number of our key trading partners have suffered negative shocks. Some have been relatively short lived, including the collapse in Japanese growth following the tragic earthquake in 2011. Others look to be more structural, such as the stepdown in Chinese growth compared to its double digit pre-crisis pace. Most salient, not least for Sweden, has been the impact of the fiscal and financial situation in the euro area over the past few years.

Supply-side

Fischer also cites the weak labor market, declining investment and disappointing productivity growth as inhibiting aggregate production.

While I agree with his view of the labor market, we should not use the heady days of the Dotcom bubble as a benchmark for investment. Private nonresidential investment is recovering.

ASX 200 Corrections

Productivity is also growing.

Productivity

Other factors

There are two factors, however, that Fischer did not mention which, I believe, go a long way to explaining slow US growth.

Crude oil prices

In the last 4 decades, sharp rises in real crude oil prices have coincided with falling GDP growth and, in most cases, recessions. Crude prices remain elevated since the Great Recession and, I believe, are retarding economic growth. The blue line on the graph below plots crude oil (WTI) over the consumer price index (CPI).

WTI Crude

Currency manipulation

China continues its aggressive purchase of US Treasuries in order to maintain a competitive advantage of the Yuan against the Dollar. Inflows on capital account — not only from China — include roughly $5 trillion of federal debt purchased since 2001. This keeps the US uncompetitive in export markets and places domestic manufacturers at a disadvantage when competing against imports.

Foreign Holdings of US Federal Securities

Recent purchases of federal debt are sufficient to drive 10-Year Treasury yields through support at 2.40%/2.50%.

10-Year Treasury Yields

Glass half empty or half full?

Bears will no doubt seize on the headwinds to support their prediction of another market crash. I am reassured, however, that the economy has recovered as well as it has, given the difficulties it faces. None of the headwinds are likely to disappear any time soon, but progress in addressing these last two issues would go a long way to solving many of them.

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Ray Dalio: The Economic Machine and Beautiful Deleveraging

Ray Dalio, founder of Bridgewater Associates, released a 30 minute video in 2013, explaining his template of the economy and how central banks and government should manage a deleveraging like the Great Recession and its after-effects.

Ray proposes three simple rules to avoid future crises:

  1. Don’t let debt grow faster than income (GDP) otherwise it will eventually crush you;
  2. Don’t let income grow faster than productivity otherwise you will become uncompetitive in international markets; and
  3. Do all that you can to raise productivity because in the long run that’s what matters most.

What is productivity and how do we measure it?

Productivity is the result of hard work and innovation, both of these factors will increase the level of output (GDP) per unit of input.

We measure productivity by comparing GDP to units of input, either:

  • the population of a country;
  • the number of hours worked; or
  • the number of people employed.

Index

Each will give a different perspective, but there are a few general rules:

  • countries with high technology and innovation (e.g. Germany or USA) show high productivity;
  • as do resource-rich countries with big extraction industries (like Norway and Australia); and
  • countries with low tax regimes (Singapore and Ireland) which attract transient income.

Read more at Labor productivity can be misleading.

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Australian Made | SBS Insight

This discussion on SBS Insight from April 24th, 2012 covers the Australian manufacturing dilemna:


SBS Insight

There are three major costs in manufacturing: material costs, labor costs and other operating expenses. Roughly equal in size. Material costs are roughly the same, whether you are in Australia or China. Labor costs are radically different, with labor costs of $15 compared to $1 in China. But Australia also can’t compete on other operating expenses, which are far higher because of the labor cost and related benefits…….I can’t see why Australia hasn’t got the sense to turn around. We have been on this path for 30 years…
~ Peter Rodeck, Australian manufacturer EnvironData.

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The Magical World Where McDonald’s Pays $15 an Hour? It’s Australia | The Atlantic

Jordan Weissmann compares wages paid to McDonalds workers in Australia and the US, raising four interesting points.

Firstly, McDonalds (or “Maccas” if we use its colloquial name in Australia) is profitable in both low-wage and high-wage countries:

The land down under is, of course, not the only high-wage country in the world where McDonald’s does lucrative business. The company actually earns more revenue out of Europe than it does from the United States. France, with its roughly $12.00 hourly minimum, has more than 1,200 locations. Australia has about 900.

They achieve this partly through higher prices, but also through adjusting their staff structure in Australia.

The country allows lower pay for teenagers, and the labor deal McDonald’s struck with its employees currently pays 16-year-olds roughly US$8-an-hour, not altogether different from what they’d make in the states. In an email, Greg Bamber, a professor at Australia’s Monash University who has studied labor relations in the country’s fast food industry, told me that as a result, McDonald’s relies heavily on young workers in Australia. It’s a specific quirk of the country’s wage system. But it goes to show that even in generally high-pay countries, restaurants try to save on labor where they can.

They also focus on increased productivity.

It stands to reason that in places like Europe and Australia, managers have found ways to get more mileage out of their staff as well. Or if not, they’ve at least managed to replace a few of them with computers. As Michael Schaefer, an analyst with Euromonitor International, told me, fast food franchises in Europe have been some of the earliest adopters of touchscreen kiosks that let customers order without a cashier. As always, the peril of making employees more expensive is that machines become cheaper in comparison.

That is one of the primary dangers of high minimum wages: automation is used to improve employee productivity and shrink the required workforce. Shrinking the national wage bill might seem like good business sense, but if we look at this on a macro scale, reduced incomes lead to reduced consumption and falling sales.

Finally, McDonald’s have attempted to add value to their product range, moving slightly more up-market in order to capture higher prices.

McDonald’s has also helped its bottom line abroad by experimenting with higher margin menu items while trying to court more affluent customers. Way back in 1993, for instance, Australia became home to the first McCafe coffee shops, which sell highly profitable espresso drinks. During the last decade, meanwhile, the company gave its European restaurants a designer make-over and began offering more localized menus meant to draw a higher spending crowd.

If we take McDonald’s as a microcosm of the entire economy, the trade-offs and benefits (or lack thereof) are evident. Funding wage hikes out of increased prices (for the same quality products) is futile. It adds no benefit: the increased wage is eroded by higher prices. Reduced wages for younger workers simply disadvantages older workers, excluding them from certain jobs. Increased productivity — higher sales per employee — on the other hand, can benefit the entire economy.

Improved training or increased automation may increase output, but run the risk of shrinking the jobs pool — unless new jobs created in training or manufacturing are sufficient to offset this. Product innovation, on the other hand, is an immediate win, raising sales while encouraging job growth in new support industries.

How do we encourage product innovation? Higher minimum wages is not the answer. Nor, on its own, is increased investment in research and education. What is needed is a focus on international competitiveness: reducing red tape, ensuring basic goods and services such as electricity, water, shipping and transport are competitively priced, lowering taxes and stabilizing exchange rates. That would encourage the establishment of new industry locally rather than exporting skills and know-how to foreign shores. We need a culture of innovation and entrepreneurship, rather than lip-service from politicians.

Read more at The Magical World Where McDonald's Pays $15 an Hour? It's Australia – Jordan Weissmann – The Atlantic.

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Rude Awakening Awaits Western Economies | WSJ

Michael J. Casey at WSJ interviews HSBC group chief economist Stephen King, author of When the Money Runs Out: The End of Western Affluence:

Mr. King’s thesis….. is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year. Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already. ”Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.

While I agree that we are unlikely to see a resumption of the rapid debt growth of the last 3 decades, this should contribute to lower inflation and greater stability, without a credit-fueled boom-bust cycle, that could partially offset the negative effects. I also question whether productivity gains are really exhausted, or if this is a temporary after-effect of low, post-GFC capital investment. There is ample evidence that the global economy is slowing and productivity gains will fall — if one is prepared to ignore evidence to the contrary such as the rise of automation, advances in genetics, nanotechnology, sustainable energy and slowing global population growth — which should alleviate the poverty trap that many countries are still in. The researcher has to beware of confirmation bias, where they gather data to support a preconceived opinion.

Read more at Horror Story: Rude Awakening Awaits Western Economies – Real Time Economics – WSJ.

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