Thoughts on the Decline in U.S. Productivity and
Standard of Living
by Victor Sperandeo with the Curmudgeon
Introduction:
We take a break from our market analysis, comments and
historical perspectives with this piece on the U.S. economy. Victor weighs in with his opinions while the
Curmudgeon provides the supporting data and graphs.
Productivity Perspective:
The heart of wage increases and living standards are
directly tied to productivity, or output per man hour. U.S. productivity crashed (declined by over
60%) after 2007, as can be seen in this chart:
The Non-Farm Business sector between 2007 and 2017 was 1.2%, while the
manufacturing sector grew at a tiny 0.7%. Those measly productivity “growth”
rates were like workers falling off a cliff.
The steep decline in productivity occurred due to the
2008 market meltdown and economic decline (aka “The Great Recession”). The productivity decline continued during the
next 8 years due to the anti-investment policies of the Obama
Administration. Under President Trump’s
2 years in office, productivity has started to rise due to a much more favorable
business and corporate tax environment.
The key to increases in wages is corporate investing
in plant and equipment, i.e. machines that allow workers to produce more things
in the same time period. Without capital investment, companies cannot earn
sustainable profits (cost cutting has its limits) and without more profits,
workers cannot increase their earnings.
Productivity is a mirror of the fiscal and monetary
policies of the underlying government.
Low productivity implies that government leaders, including the justice
system, are not promoting policies and laws that allow risk takers to flourish.
Unless this changes, the
U.S. standard of living will continue to decline (more on this in Declines in
Wages and Middle Class Stability below).
Curmudgeon Asks:
·
Will the Democrat
controlled 2019 House of Representatives pass legislation that will provide
incentives for increased capital spending?
·
Will Congress reduce
the use of regulations that restrict companies experimenting with new business
solutions?
·
Will corporations use
some of their tax cut savings for expanding plant and equipment rather than for
stock buybacks and increased dividends?
·
Will states change or
adjust licensing requirements, which can and have inhibited investment, e.g.
pole mounting fees for broadband wireless antennas and base stations.
Entrenched interests have captured state legislators and often erect barriers
to entry, keeping wages of the privileged licensees high while harming the less
skilled looking to earn higher wages.
Declines in Wages and Middle Class
Stability:
The history of the decline in real wages (adjusted
for inflation) and employment started in 1971 when President Richard Nixon took
the U.S. off the international Gold Standard. There was no longer anything
backing the U.S. dollar, just the “faith and credit of the U.S. government.”
Shortly thereafter, Nixon invoked price controls to
curtail inflation- a policy that backfired.
On Aug. 15, 1971, in a nationally televised address, Nixon announced, “I
am today ordering a freeze on all prices and wages throughout the United
States.”
In July 1974 (after the first Arab oil embargo),
Secretary of State Kissinger negotiated the U.S. would buy oil from Saudi
Arabia and provide the kingdom military aid and equipment. In return, the
Saudis would plow billions of their petrodollar revenue back into U.S.
Treasuries and finance America’s spending.
That laid the groundwork for the U.S. to become hostage to the Saudi’s.
China’s opening up to the
rest of the world via Deng Xiaoping’s economic policies caused the decline of
the U.S. textiles and shoe manufacturing.
The decline in auto manufacturing came after NAFTA
and GATT in 1994. Think of how many foreign cars are sold in the U.S. today
versus 40 or 50 years ago?
The Guardian
newspaper identified five U.S. industries on the decline which they
assert caused voters to favor Trump in the November 2016 elections. They were:
manufacturing, coal mining, steel, textiles and cars.
Manufacturing jobs peaked in the 1990’s and decreased
from almost 20 million to a low of 11.3 million in 2010, and today is 12.75
million. Despite hopes for high tech manufacturing
to return to the U.S. it hasn’t happened.
That’s largely because of ever increasing outsourcing to China, Taiwan
and other Asian countries.
In 2017, China had a trade surplus with U.S. of
$167.3B in computers and electronics; $40B electrical equipment, $38.6B
miscellaneous manufacturing.
Also, 100% of the top 20 smart phones and tablet
computers are made in Asia. That
includes Apple’s iPhone and iPad (made in China by Foxcon)
as well as all the phones and tablets sold by Google (made in Taiwan by
HTC). Same for WiFi
routers, “white boxes,” and “bare metal switches,” all of which are made in
Taiwan or China.
In conclusion, U.S. median household income, after
inflation, has been stagnant for 20 years.
Only recently (about 2 years ago), it began to increase ever so
slightly.
The Debt Build Up:
From June 1971 to 9/30/18, U.S. government debt
compound at an 8.81% rate of increase while real GDP was 2.75% at an annual
rate. As of 12/31/2018, Total U.S. federal government
debt stood at $21,974,095,705,790.55.
That’s almost $22 trillion dollars.
It’s growing faster than ever now with $1 trillion
dollar annual U.S. budget deficits.
àWhen will that
debt reach a tipping point such that foreigners lose confidence in the U.S.
dollar and instigate another financial crisis?
Summary and Conclusions:
The U.S. government uses GDP to measure economic
growth. Therefore, the U.S. economy looks good most of the time. However, if you use “median household
income,” the U.S economy looks terrible.
The latter is what counts for stability, not the Fortune 500 or a total
of 3,000 large corporations that use accounting tricks when they report
profits.
In 2008 to 2009, big banks were bailed out, but not a
single banker lost their job or went to jail.
At the same time, many people lost their homes to foreclosure.
The 2017 federal tax cuts largely benefited
corporations at the expense of “we the people.”
In several years the personal tax cuts (which were tax increases for
those living in high tax states) will expire.
After factoring in inflation those cuts will be zero or negative.
As we import illegal immigrants it drives down wages
by increasing the supply of workers.
Outsourcing in effect transfers jobs to China and other lower cost Asian
countries.
We really don’t have capitalism in the US. Instead,
we have socialism. I touched on that in
a recent Curmudgeon
post where I said, “When loses are prohibited, you have a political
system based on Socialism.”
In recent years, there have been huge profits for
rich stock holders and low capital gains taxes when they sell stock. At the same time, the middle class is
shrinking, and the working class is struggling.
Flawed government policies are killing America, which
is thereby losing its liberty. It is
destabilizing the nation. As corporations make political donations (euphemism
for “bribe”) to change laws in their favor, and the stock holders get rich, the
general population gets poorer.
Is America is
committing suicide?
Quotes that seem relevant today:
·
Bernard M. Baruch put
Karl Marx in his place when he said: “Unless each man produces more than he
receives, increases his output, there will be less for him and all the others.”
That is the exact opposite of Marx’s theory of exploitation!
·
John Galt put it in simple
terms: “Long-term improvement in productivity is the result of a continually
increasing capital base and advancing technology. Increasing productivity is
the key to lower prices, higher wages, and thus, a higher standard of living.”
From the book: “Dreams
Come Due,” by John Galt.
·
“The United States
brags about its political system, but the President says one thing during the
election, something else when he takes office, something else at midterm and
something else when he leaves.” Said Deng Xiaoping- China’s former leader.
·
“The way to crush the
bourgeoisie (i.e. small business) is to grind them between the millstones of
taxation and inflation.” But the Marists have thrown in the working men and
women as well.) Vladimir Lenin
Good luck and till next time…
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
Copyright © 2018 by the Curmudgeon and
Marc Sexton. All rights reserved.
Readers are PROHIBITED from
duplicating, copying, or reproducing article(s) written
by The Curmudgeon and Victor Sperandeo without providing the URL of the
original posted article(s).