The big issue I see is economic inequality. It's a huge problem and has been since neoliberalism came around.
Unless any of this productivity leads to higher wages for workers, this is all going to end up making rich people richer.
I am reminded of the old Soviet joke, "So long as the bosses pretend to pay us, we will pretend to work." Actually the neoliberal variety of capitalism has nobody but itself to blame - when you treat people poorly, give them low wages, and temporary jobs, it is inevitable that this would happen. Plus corporations these days care only about quarterly profits and stock buybacks, not on long term investments that will lead to cash spending in the short run, but bigger long-term gains.
Unless this current system changes, I am skeptical that we will see better conditions for workers. Ultimately, an economy is for the people who live in it.
2
I think you had better go to your local McDonalds if you think automation and kiosks are going to increase productivity. It takes way longer to order through them then through the counter. Page after page for your egg mcmuffin then more pages for your coffee then more pages to pay your bill. It is getting so bad that to get a cup of coffee the cashier forced my wife to go to the kiosk with him to put her order in. They will have to hire extra employees to make them work, that won't increase productivity.
1
"they’ll have no choice but to re-engineer how they work to try to increase productivity"
Amazing how the state of being of the laborer doesn't seem to factor in to 'productivity' expectations. Nope, it's all about 'efficiency' which means downward pressure on wages or technological deflation (which also tends to mean downward pressure on wages).
Reality is Labor is taxed more than Land or Capital - Hence returns will always preferentially go toward these two inputs for new investment. Labor will always be the last to see any gains as long as this remains true, and usually we see a 'correction' at that point.
3
Efficiency has become an obsession. We worship this false god. Let there be a little slack in the economy, some flexibility, some mercy.
3
The word 'hope' is used repeatedly in this article. Sounds risky! I was reading, today, that China has expanded its holding of US Treasuries to US$1.8billion and when push comes to shove, these dollar assets will be weaponised.
International trade is the sustenance that keeps countries peaceful. Disrupt it at your peril.
1
It took them ten years to figure this out? And it's considered "provocative"?
And this:
"Higher productivity will in turn make it easier to justify higher wages, creating a self-reinforcing cycle of higher economic growth."
Right. That's what the economics textbooks still say, even though wages decoupled from productivity back when Jimmy Carter was President. Which is one of the reasons Trump was elected, the developed world is imploding, and nobody trusts economists and their fairy tale economic theories anymore.
Maximizing-shareholder-value capitalism is about to intersect with AI and automation tools that will have unprecedented job destruction capabilities and will be able to take productivity towards infinity.
When they do, it will be cataclysmic, with massive job losses, globally, and the only people that should "excite" are demagogues who will make Trump look like a Cub Scout.
4
That demand is necessary to drive increased productivity in an industry hardly seems news; it’s either directly stated or clearly implied in Marx’s Capital. The problem is that as productivity gains drive workers out of a job, the economy is stuck with a greater number of unemployed or marginally employed workers, which hardly bodes well for demand. Hence, depressions and sometimes wars to redivide markets. The other problem is the U.S. has largely become a service economy, overhead relative to production and the generation of new capital, hence productivity increases have increasingly taken on the character of squeezing blood out of a turnip.
2
"...we should change how we think about the advancements that make society richer over time."
--less crime
--less pollution
--greater (occupational and transportation) safety
--faster communication (see self-serve kiosks)
--more information
--better medical care
--less disease
--better nutrition
--less divorce
--better sexual relations
--more sleep
--...
so many things could be included in the value of production, productivity and the standard of living; it just depends on what we want to produce and how we choose to value our living.
p.s. money and credit--which are used for demand--are illusions; accounting is arbitrary.
4
So then we should re-boot the timeless model of bartering...albeit with a synergy of perceived "valuations" ...in that never ending quest for a "great" deal...;) Accounting is certainly arbitrary...its endemic to our financial structures/law/testosterone power.
1
Everybody’s employed, but a lot of new jobs we have, such as airport screeners, have zero contribution to ecomic productivity. Furthermore, an average American today spends 7% oh his/her waking hours on Facebook https://www.nytimes.com/2016/05/06/business/facebook-bends-the-rules-of-.... People are on social media at work and at school, destroying all productivity gains from technology.
Your half way on this point...with not including this majority of this FB-induced brain-drained activity is overwhelmingly affecting portion of our adult population that's also on a weak to barely "marginal" in wage/income output specific to discretionary spend, not the essentials...bear that in mind. Read our latest PCE index for more specifics in metrics.
1
This article is just a bunch of speculation, which told me absolutely nothing useful about the world or whatever this "new research" supposedly reveals. Really, we are only now realizing that productivity might be affected by demand, not just supply?
1
John Maynard Keynes made exactly this argument in his 1936, The General Theory of Employment, Interest, and Money.
1
Repeat with me: it's not "good workers are harder to find" it is "cheap workers are harder to find"
7
We need AI to replace economists.
4
I liked this article and respect the evident objectivity with which the research was done. I feel too much of economic research in recent decades has been driven by preconceived notions of what was suitable to say. These matters are devilishly complex and it is appropriate to approach them with a degree of humility fitting for creatures who recognize we all share 70%of our DNA with slugs.
1
and that most economists lack sufficient EQ levels...
It seems like when it comes to the average worker, he or she is left to the mercy of hope....
You're on your own. No one is going to help you except you. And the deck is stacked. It isn't going to be pretty.
3
And, the obscenely and unnecessarily moneyed and otherwise wealthy have just given bones with 2 pieces of grizzle on them to the employees; thus, fooling the employees into believing the owners are giving them a meaningful salary increase, rather than the cruelly small amount of the unnecessary profits the owners and rich investors pocket: This while the obscenely and unnecessarily moneyed can truly afford to pay employees much much more. Albeit, they have deprived the people for so long, that the people are at risk of believing that, if they do not vote Republican, the bones with 2 pieces of grizzle will be taken back from them. The truth of the matter is that the people are being cruelly and unnecessarily deprived by the Republicans. If employees were paid a fair amount the economy would be truly stimulated.
3
"Growth for the sake of growth is the ideology of a cancer cell." It will all come to an end someday. Fortunately I'm old enough that I will probably be dead when the roosters of cancer economics come home to roost.
1
The health care industry wants you alive.
They will prolly keep us pumping 'til we're 120yrs old
And better managers.
1
We can only hope this article is accurate
1
Neil, please look at McKinsey's estimates and assumptions, which would never make a peer-reviewed publication.
1
That graph is very misleading. Many people will glance at it and think it says productivity has been dropping. But that graph is productivity GROWTH. Since it is always positive, productivity has been INCREASING throughout that period, Workers have been producing MORE in a unit amount of time.
Now compare that graph with real wages and see who has been getting screwed--the workers or the rich owners who benefit from all that increased productivity.
This is part of a long term trend. From 1948 to 1979, worker productivity rose 108%, and hourly worker compensation increased 93%.
From 1979 to 2013, worker productivity rose 64%, and hourly compensation rose just 8%.
The difference?
From 1978 to 2013, CEO compensation increased 937% while worker pay increased just 10%.
And please don't recite any anecdotal evidence about Walmart etc. giving a one time bonus to workers to try and make to make Trump look good. Look at what has happened after previous tax cuts:
https://www.nytimes.com/2017/12/26/business/economy/tax-cuts-incomes.html
https://www.nytimes.com/2017/12/17/opinion/taxes-inequality-charts.html
If you are not very wealthy, you are being played for suckers.
5
It is interesting how as the Obama era recovery reaches its boiling (and probably end) point,economists start obsessing about productivity rather than consumer demand.Alan Greenspan talked endlessly about productivity but never about how irrelevant the whole concept became when the big banks had their way with packaging capital.These researchers are only talking about the supply side when they say they have discovered that demand for products that would improve productivity exists.With baby boomers retiring,healthcare cost rising,and more wealth being funneled to fewer and fewer consumers by tax cuts,we will soon find out that real demand,consumer demand,is what will matters.It never fails to amaze me how theoretical we become during boom times.I wonder what these researchers said before 2008.....what was their position then.It would be interesting.
2
And, let's not forget that citizens' health care spend/costs...get lumped into our 70% GDP consumer spend ratio...a total joke, Europe's GDP is more absolute, not as "gross" related in its computations, e.g. like how skewed our growth is...via antiquated unemployment and U-6 under rates.
1
As an owner of a large engineering firm - i can attest that the tight labor market IS in fact leading to productivity gains. We are actively investing in our own processes and tools to expedite our product delivery to maintain competitiveness in a tight market. Employees are commanding higher salaries due to both the tight labor market (supply and demand) and to increased responsibility as their positions have been elevated through elimination of tasks which are being automated. I think this article is spot on and expect this trend to continue as the labor market becomes tighter with full employment.
6
"Employees are commanding higher salaries due to both the tight labor market (supply and demand) and to increased responsibility as their positions have been elevated through elimination of tasks which are being automated."
We often lump instead of sort in this conversation about a tight labor market and productivity. What part of the labor market is tight? Is it lower management, white collar STEM jobs? Why?
We have to factor in demographics of generations. For instance, there are fewer people in their forties and early fifties to replace late cohort boomers who are closer to retirement. This would cause a tight labor market among jobs usually held by people halfway through their careers.
Let's talk about Millennials, now in their mid-twenties and thirties, and a larger generation than Boomers. These folks got a late start in careers due to the recession, and are getting to a point where the desire to settle down and form families is running head-on into job shortages. This generation needs entry-level jobs the most, jobs that are being replaced by automation. There is no tight labor market there. Instead there is underemployment, which holds back the economy's potential as these people are still doubling up with parents or struggling to pay housing costs that consume a huge amount of monthly income.
Boomers, also, need and want to continue to work but face age discrimination. Employers: hire some! Give them a chance.
"Tight" labor market? Not so much.
3
Try though they might, the rich folks we've given all of the money to just can't spend fast enough to create the demand we need to increase productivity.
I'd be happy to help.
9
I concur with your generosity...
1
To provide "Demand" requires income or wealth. That ability is the underlying social support that the owners of instant capital wealth undercut. Maintaining the continued ability to purchase products creates a long lived income stream for owners that far outperforms to their benefit. Wages that provide an accumulating comfort margin and social benefits that provide the continued consumption are paramount to maintaining both sides of the transaction through good and bad times.
3
There is an element in this matter of domestic productivity that seems totally ignored by those who (unlike those in my age group) do not remember when Pacific Ocean sea lanes were made very hazardous by a hostile navy, essentially impassable for cargo ships from Asia bound for the US. This meant that all imports from The Far East ceased.
What would happen to us today if that ever were to be repeated? Look at where most of the manufactured goods necessary to sustain our daily lives come from today. If we were to experience again the shipping vulnerability experienced shortly after Dec. 7, 1941, we would be on our knees begging our enemies for some type of surrender terms in a matter of weeks. Fortunately, back then, most of those goods were available without requiring shipment by cargo vessels across a broad and perilous ocean. Does anyone understand what I am saying?
7
It is likely there is some truth in this article as the lack of potential employees forces company's to automate. However, we need to remember much of the productivity gains in salaried people is related to working more hours and being afraid to record them all.
10
Exactly. Productivity is a measure of worker fear and always has been, especially when accompanied by stagnant wages. Who works harder for the same or less unless circumstances reinforce that unnatural behavior?
5
So, when the next recession happens and people start looking for jobs, they will find it even harder because most everything will be automated.
Another reason not to have children.
14
And wasn't it also horrible when the horse and carriarge was replaced by the automobile?
Lucky for you people didn't stop having children then.
1
I see your point, but I'm not sure that's an apt comparison.
Alexander,You may have heard of the "robber barons" who came into being during the period you're citing.This is almost exactly what is happening now.And you must know how the whole thing ended in the late 20's ,when pure greed raised it's ugly head.This "breakthrough research" is just recycled Keynes with a very minor emphasis on productivity.The economic changes during the turn of the last century were about the creation of new industries ,not about higher productivity.
Another reason for optimism is increased familiarity with mobile apps and related technology facilitating the introduction of productivity enhancing investments.
Productivity is obviously a positive word which has been narrowly defined by economists to involve producing more things and services and/or higher quality things and services. That approach has value: for economists' theories and the society overall. But literally the word would also include producing more leisure time, more healthy stimulation, and more relaxed lives. I don't thing even many economists would personally disagree. Technological progress sometimes has these effects, but today it more often increases overall stress on and off the job -- at least for the great majority.
10
Verrrry interesting; McKinsey has discovered Keynes - perhaps it's not too much to hope the Laffer curve soon be hitting the waste-bin ?
A ray of hope, and none too soon:
https://www.nytimes.com/2018/02/20/opinion/destructive-political-tribali...
8
Three-fourths of productivity growth since the mid-seventies has been taken as corporate profit, with one-eighth returned as wages. Workers can't significantly increase consumption, and demand stagnates. Productivity growth has to be accompanied by political redistribution of wealth to grow the economy.
31
Owners would argue that the productivity gains are due to their capital investment. Ergo they should gobble the increased profits.
This article is on the right track. However, what it calls demand is really more of the costs of production on the supply side of the economy.
The key to demand-led growth is worker income to pay for demand. Workers must do more than want things, they must pay for them. The economy must do more than supply things, it must get paid for them.
"Who is going to buy it" is the big question for growth in today's economy. That was not the problem in the 1980's, when wages were relatively higher and the % worker share of the economy was higher.
They've killed their golden goose.
19
People may spend their tax rebate but there's still not a lot to spend. Giant Hershey bar, anyone? Just wait till next February. If both houses of Congress stay GOP, the cuts to Medicare and Social Security will make this year's cuts look like something fixed by a bandaid. Since I'm on SS, I have made it a priority not to buy anything this year that isn't a necessity.
15
This was a good article. I look forward to more automation. It will allow the economy to advance without too much inflation. Low inflation will allow the Fed to take it's time on raising interest rates thus allowing the bull market to continue. In the past government has allowed increases in productivity to benefit companies that could draw from an endless pool of workers but as the article says that is no longer true. Incomes are going up as that pool has diminished and this often means workers will step up and be rewarded for either finding better paying jobs or being promoted to help manage the automated process.
3
Why is demand so low?
It is obvious by now that the people who need money & would spend it if they had it simply do not have enough. We have just have 2 studies that showed if the typical American family had a real emergency & had to come up with some money, they couldn't do it. One said about half the people couldn't come up with $400 & the other that 2/3rds couldn't find $1,000.
There are two reasons for this. One is the federal gov is not sending enough money to the private sector. It does this by deficit spending, but the deficit has fallen 75% since 2009. The other reason is that the money it and the FED HAVE sent is not very useful. Economist would say it has low velocity which means it doesn't change hands in domestic commerce very much. If you look at what has happened to the velocity of money since 2008, you see it has plunged.
Why is this? Because too much of the money is going to the people who do not need it & use it to speculate. If you compare the percent of money going to the 1% with the velocity of money (MZM), you will see the curves are almost precise opposite of one another since at least 1960.
The rise in the stock market is a symptom of this in which more & more money is chasing itself around uselessly.
THUS, while Trumps' polices may send some more money to the private sector, most of it will not be useful.
29
Len, I agree that most of the money from the tax cuts will go to the wealthiest Americans, who will spend it on consumption: stocks, yachts, ski vacations, and baubles. But you seem to contradict this by saying that the federal government is not sending enough money to the private sector, because deficits are decreasing. This last strikes me a dubious, because of the government's spending on defense and now the short fall in revenues due to the massive tax cut. Please explain if you will.
Mr. Irwin seems correct when he says that the shortage of labor will encourage business to invest in more labor-saving capital goods, which may increase labor productivity.
This in turn will keep wages low, and increase income inequality, which right now has become America's greatest political problem.
8
It just arithmetic. Diogenes. When the federal government spends $5, say, that money passes from the federal government to the private sector, people, businesses and state & local governments. When it taxes $3, say, that takes that money back from the private sector to the federal government. The difference, $2, is what stays in the private sector and that is precisely the deficit.
It makes no difference what the money is spent on. Now as I remarked. that $2 may be useful (high velocity) money or not useful depending to how it was spent and how the $3 was taxed back. Also the $5 may do good things for the country or not again depending how it is spent. But the amount left in the private sector for us to spend is exactly the federal deficit.
As for investing, if that would work why hasn't business already done it if it can save money. If you talk to business they will tell you that they invest more money when they can sell more stuff. They cannot do that until there are more people with money to buy the more stuff.
So we need to get more useful money to people, businesses and state & local governments. That requires more deficit spending going to the people who are not rich.
Understand now?
This article basically explains why the entire premise if the supply-side Republican tax plan was wrong for the economy in it's present state.
Companies will not heavily invest just because they have more supply of money when the economy is in a demand vacumn.
The largest tax cuts should have gone to the working and middle class, because that is where the greatest source of consumer spending (70% if the economy) exists.
Companies absolutely will invest in plant and personel when demand, or the perception of future increased demand, exceeds their current and potential output.
27
Many of today’s largest companies, such as Google and Facebook, are not capital intensive, and don’t invest in plants etc. like manufacturing companies once did. There is very limited “multiplier” effect from the revenue genrsted by theses companies.
1
" .. The largest tax cuts should have gone to the working and middle class .."
Pelosi and the Democrats advocate that?
No.
My smart phone simplifies my life. I no longer need to buy, find space for, or dispose of a camera, address book, phone directory, alarm clock, calculator, desk or wall calendar, flashlight, ruler or tape measure, wallet, travel wallet for tickets, notepad, train, bus or ferry schedule, newspaper, television, compass, atlas, or video game. That's just for starters.
Many of these items had a physical presence in the past. They were built in factories or printed in a printing press. There were long supply chains, each step increasing the value of the object. To store them, I needed space, itself a product of raw materials, skilled labor, and manufacturing. These items died and were tossed into a landfill or recycled, some replaced fairly often, whereas my smart phone leaves a much smaller footprint -- about three cubic inches.
As we downsize, having a more compact existence will save us space, money and time. It also means we will be consuming far fewer "things" and savoring more experiences. If there is any multiplier effect, it is the effect of an item such as a smart phone as it eliminates the need for "things" across the economy. How does that affect productivity or demand?
Doesn’t this effect also mean that companies can now substitute technology for workers, and thus avoid having to pay workers a more competitive salary? Is this why we’ve seen such a slowdown in wage-growth?
12
As a share holder I should be in favor of increased productivity. But given historically productivity gains are not shared with workers. As a citizen I am not excited by productivity gains as it is used as one more weapon in class warfare.
24
In my years working on the production line at Andersen Windows, I witnessed a drastic reduction in productivity. The production on some lines dropped from 1500 units to 300 over the years. But, the production didn't just disappear, it was replaced by more choices and more custom orders for consumers. When I started, we made 640 identical windows in a run with no changeovers. Over time this changed to 1 to 20 in a run, of different colors, and sizes, with special glass, and other options made to order. Another change was lean manufacturing, reducing inventory of materials to a minimum. Lean manufacturing reduced the cost of inventory, but increased the cost of labor due to occasionally having to wait for material. These changes might explain why the cost of labor has gone up, while profits increase.
6
The reduction of inventory may have gone too far for the conditions of the American economy. There is too much waiting around for delivery of what is no longer held on hand.
My auto mechanic can't do the work on my car until the parts are delivered. Every one hour job is now half a day, most of it waiting for simple parts that they use every day. What we've lost is the repair shop with its walls lined with parts, fan belts of every size for example. Remember those?
Ordering parts when needed started in Japan, when it meant delivery across town. Distances were short, and times were shorter still because they did not go to the extremes of having nothing on hand. In America, orders come from further away, and less is held on hand by people managing the inventory costs instead of managing the job that needs doing.
9
I am not particularly ''excited'' and nor should you.
The problem with all of this ''research'' is that it always deals in the abstract and with mathematical equations that do not take into account things on the ground ~ or the people and their lives.
Sure, GDP might be up and overall wealth might be as well. Sure more people across the globe are being brought out of poverty ( not hard to do when half of them are making only a dollar or two a day ).
The problem is ( at least in the 1st world ) the disparity is growing more and more between top and bottom. Those in between are being pushed down to said bottom as their buying power does not keep up to inflation. They have to work harder, longer and for less money, security and benefits.
This is no coincidence as unions lose more and more bargaining power and governments allow more and more loopholes for tax evasion and inversion.
We add another decimal point to the bottom line but are subtracting too many people to do it.
19
My belief is that productivity increases are destined to decline. Technology advances, paired with a human worker can only go so far, as a human being can only handle so much. Productivity increases at its limit, will approach zero, and at that point, humans will be replaced by technology, and that will free humans from work, but at the price of having no jobs for us humans. The greatest challenge facing the future, is what to do with all available labor pool. To have an economy, we the people need jobs!
8
I agree that it is hard to sell product to people who can't afford it, but with proper education and training there is no end to productivity.
1
Yes, wages need to go up, but we wouldn't have the so-called "gig" economy if there were more jobs for young people or people returning to the workforce to begin with. Automation has its benefits, but they skew toward companies at the expense of workers. Demand is lower than economists assume. People are working two jobs because there aren't enough hours in one job to fill the need. Rent is up and food and energy are rising so people in the middle class are learning to compensate by doing without, going to second hand stores, Craig's List, re-purposing things, do-it-yourself, barter before shopping--things long familiar to people with lower incomes.
23
It doesn't matter how much gets produced if there's no one to buy it. Giving secretaries an extra $1.50 a week might pay for membership at Costco, but until actual buying power of the working class increases the economy isn't going to go anywhere. Trickle down still doesn't work.
45
To paraphrase West Side Story:
"I'll get a membership at Costco"
"What will you be able to buy though?"
1
Extra spending on consumer goods does less good here than it once did. Now it essentially creates more employment in factories in China.
4
Neil Irwin again suggests that economists, whom he suggests all thought supply-side economics was an adequate model, are beginning to look more closely at the demand side as well. That may be true in GOP-land, but the wider world always considered demand. However, Irwin thinks demand is only demand for productivity since there will always be boundless consumer demand to drive it. Irwin needs to look at how the fruits of this economy are being distributed.
13
Another piece of the low productivity problem:
When workers are displaced by new productivity increases or "automation", if they move on to other high productivity jobs, productivity increases. However, if the displaced workers wind up in "McJobs", average productivity shows little gain even if the new manufacturing or retailing enterprises are increasing their productivity.
Even more true if displaced people simply leave the labor force.
10
I am not optimistic at all and I really think that economists got it so wrong. The "productivity gain" has less to do with humans. I would argue we finally saw productivity gain because we are in "full employment". So companies are forced to invest on technologies. Even though humans are still humans, automation and AI increase overall productivity in a "tight labor market". Very unfairly, humans got the credit (for productivity gain)!
I have been arguing about less cheap labors to force companies investing on technologies. Countries with less population will do better in the near future when automation and AI take over. Humans are liabilities but not assets. Because upward mobility is not working (and I haven't seen any realistic solution to solve the problem - because there are no solutions!), taking in more low-skilled immigrants is unwise and plain stupid.
Therefore, I support Trump's immigration policy. I want to protect America the beautiful from urban sprawling. I want to protect America from falling behind by wasting valuable resources on uncontrolled population growth.
2
If you're going to post from Saint Petersburg, Russia, at least try to emulate American spelling mistakes instead of using a typically foreign speaker's circonlocutions.
Not if you are doing it like the current Republicans, ie with trillion of dollars of public deficits going to billionaires on the backs of the average working stiff.
Look for the bust, it's coming, the only question is when and how much.
Signs of it are already here with the recent yo yo volatile effect in the stock market.
14
The stock market has correctly identified 9 of the last 5 recessions. The US is in the early stages of era of prosperity as the article says. Automation replaces the jobs it takes with better and higher paying jobs. The stock market needed a correction to set the base for a bull market.
"automation leads to more income going to owners of capital, who already tend be wealthy, that could hollow out middle-class jobs" is true in various occupations I have seen myself. CNC machines have replaced workers in the local metal fabrication industry. Self checkout at our local Walmart is the norm. Farmers in our area farm 4 times as much land with one half the workers thanks to technological change. Add to that, the cost of automation is dropping rapidly making it much cheaper to automate. A majority of occupations are being affected by automation, displacing workers and those jobs are not coming back, no matter what a politician or economist tells you.
14