Productivity Grows. So What?

Sometimes it takes a very long time for reality to clash with long held beliefs. No amount of discordant information can shake some people from the bits and pieces of “truth” that they carry around with them. This seems to afflict economists more than most. Those dictums based upon orthodox theory die hard no matter what amount of contradictory data piles up.

A case in point:

“Increased productivity is critical to a rising standard of living because it usually leads to higher wages for workers and bigger profits for companies. When workers produce more in the same amount of time, companies can increase their pay and still make the same amount of profit or higher.”

This is a quote from MarketWatch, a Wall Street Journal online service. The article from which I took it is reporting today’s news that fourth quarter productivity in the US economy rose 2.6% – output rose 4.0%, while hours worked rose only 1.4%.

In textbook terms the quote is accurate. Productivity improvements through time are the great engine of wealth creation. Indeed wages and profits depend on productivity enhancement in order to sustain their growth.

But it defies belief that the reporter failed to note that the vast majority of productivity improvement in recent years, indeed decades, has gone towards profit and not wages.

I realize the quote includes all sorts of subtle hedges in its wording. The word “can” as in “…can increase their pay …” gets business off the hook. It means that pay increases do not necessarily flow from more productivity. They might. They might not. Companies might just decide that all the gain should go to capital. In which case the link between rising productivity and wages is broken. As it has been for years. In fact, in my opinion, that severance of the link between productivity and wage growth is one of the most significant stories of the last few decades. I have said it many times here: corporate profits have boomed while wages have stagnated. Understanding that separation is essential to understanding recent economic history. Looking back at the Bush era, the only major aspect of success in the economy was corporate profit. Everything else was decidedly average or worse.

That we can still use the old dictum as an off the shelf comment in a story about productivity is beyond me. It remains a true statement. But it has no relevance to today. It has no relevance to the economic situation faced by our workers. It displays an indifference to their plight and an ignorance of how demand plays into growth. It is also symptomatic of the failure of our economic and financial media to come to grips with the actual substance of the economy. They prefer to deal with orthodox abstractions as if they represent insights into real economics. Presumably that’s what they learned. Which is why they fail to see what is going on.

So much of our malaise rests on the extraordinary shift in wealth within the economy. As David Ruccio has shown us with all his charts and graphs, more and more of it is accumulated by fewer and fewer people. A major contributory factor to this rising inequality is the ongoing asymmetrical distribution of the spoils of productivity growth. Avoiding a discussion, or even a passing reference to this very evident fact, dilutes to meaningless the upbeat message the reporter is trying to get across. This may suit the readers of the Wall Street Journal, but it isn’t good reporting of the economy.

Further: one of the reasons that austerity budgets are so repugnant to average people stems from the failure of our economy to distribute the gains accumulated over the last three decades more fairly. They never gained in the good times, and yet they are being asked to pay the price in the bad times. The gradual suffocation of the middle and working class is very much a function of the failure of productivity improvements, much of which stems from extra hours worked, to flow to those workers as it used to. The Reaganite reversal of the post war social bargain that productivity gains were shared needs to be kept in the public eye constantly. The fracture of that bargain explains the trajectory we have followed. By reducing collective action, or common purpose, and replacing it with a relentless pursuit of individualism, we have turned long held relationships into historic artifacts. They are quaint. They are not useful today. Looking at the recent data we do not live in an economy where productivity and wages are linked.

So we need to toss the idea overboard. That might be true in theory. Though I doubt it ever was as closely related as the orthodox think. Why? Because their theories eliminate collectives. Except for the great collective known as the market. But that’s another story.

Back in the here and now we need to explain why it is that businesses can see significant gains in productivity and yet not increase wages. And don’t tell me that it is a function of slack in the workforce because of the crisis. That doesn’t explain three entire decades.

The quote I began with demonstrates an ignorance of the real story. Or a willfulness in ignoring it. The headlines should be: “productivity rises but wages flat“.

Now that’s a story worth being told.