It’s The Supply Side, Stupid

What is behind the lagging U.S. growth over the past decade and more?

The improvement in labor productivity.

Just look at the following chart.

People wondered why economic growth was not that substantial during the 2010s.

Well, note that for the whole decade, the growth of labor productivity in the United States remained right around 1.0 percent per year.

After labor productivity jumped around during the years of the pandemic period, 2020 into 2021, labor productivity has actually declined for the past year and one-half.

Overall, the compound rate of growth of labor productivity has risen by only about 1.0 percent per year for the past thirteen years.

And there were 517,000 new hires in January 2023 and the unemployment rate dropped to 3.4 percent, the lowest rate in a long, long time.

Yet there were layoff notices all over the place this past six months in high-tech.

What is going on?

Retailers and restaurants have been filling up with new hires.

Technology, not so good.

The New Deficit

Actually, I have been writing about this for some time, for the issue has been around for quite a few years.

And, the lack of growth in labor productivity is having a profound impact on the real growth of the whole economy.

I mean, can you imagine going ten years or so, where the compound rate of increase in labor productivity is one percent or less?

At one time, the thought of a performance like this was unthinkable.

Now, we have to find out what is happening. Why is the growth in labor productivity so slow? Why is the economic growth of the United States so slow?

Well, you may have a supply-side answer.

There certainly has been no shortage of demand-side pressure over this time period.

But, the demand-side pressure has taken the form of credit inflation and not the acquisition of investments in physical assets that could build up supply-side pressures for growth.

That is, the credit inflation of the past forty years or so has seen stimulus monies going into financial assets and not into physical assets. Financial innovation has been one of the key elements of economic performance going back to 1980.

One has seen major changes in financial instruments and payment systems through these years as the financial sector grew and grew and grew.

But, investing in financial assets during this period of time was high return with modest risk because the Federal Reserve was, basically, underwriting the rising asset prices in the stock market, the housing market, and in the prices of many commodities.

Stimulus funds were not flowing into investments in physical capital.

Meaningful Measurement Of Output

But, this raises another point.

The creation of greater productivity is different in the financial area than it is in the manufacturing area. Our basic understanding of labor productivity comes from the manufacturing sector. And, our understanding is tied to physical output.

This is not the case in the financial world.

How does one measure productivity in the banking sector?

How does one measure the growth of productivity in the output of something intangible?

Big questions.

But, what other areas are experts having trouble measuring output and the labor productivity connected with the output?

Well, three sectors of the economy come to mind where these calculations are fuzzy.

First, what about the health industry? How is a meaningful output measured here?

And, if a meaningful output can be measured, how is labor productivity measured? Can it be measured?

Health care has always been one of the trouble areas for the discussion of “output” and “productivity,” but the trouble in measuring these factors in the health industry are really troublesome.

Health care is, in most ways, intangible. How can you put numbers on something that is really meaningful to the output connected with healthcare?

Just one person successfully treated is not really very meaningful. But, how do you really measure the output of healthcare in a really meaningful way?

Then there is the field of education. What “output” is produced? How is it measured?

What if a professor can successfully teach a class of 30 people, does this apply to all subjects? And, what about a class that applies mass lectures? And, what about an internet-based of several thousand students?

Why have colleges and universities found it so convenient to add more and more adjunct professors to handle basic subjects and not find other means to satisfy the demand?

Lots of issues here in the education field that have not been discussed, or have even been raised.

Finally, what about government?

Government has been a major “user” of bodies.

Got a “field” to cover, hire some people. Another area is getting voter attention…hire some more people. And, so on and so forth.

How do you measure the output of a government division? How do you measure the labor productivity of a government division, let alone measure the productivity of a whole government body?

Certainly, the measurement of output is important and, likewise, the measurement of labor productivity is important, but how do you construct something that is really meaningful and something that can really contribute to the understanding of how the economy is growing and spreading?

The Times Are Changing

One reason why these issues are coming up now is because the times have changed and we find it difficult to use the statistical series we have because the way things are done now just do not conform very well with the way things are measured.

So, we do need to re-draw our system of statistics, to provide us with more information that will help us to better-understand what is going on.

But, we need the new statistics in order for us to construct the appropriate programs that will help to make the economy better off and to help us work out the appropriate way to stimulate the economy…if it needs stimulation.

In my mind, the statistics, right now, are pointing to the need to stimulate the economy from the supply-side. We need programs that will contribute to growing labor productivity. We must concentrate more and more on the intangible.

This will be hard.

But, we must do it.

Fifteen years with the growth of labor productivity coming in somewhere between zero and one is not an adequate solution.

So, we must change our focus.

It’s the supply-side, stupid!