Suitably Flip

U.S. Workforce Unexpectedly Productive, Despite You Reading This Instead Of Working

Productivity grew by 3% in the fourth quarter of 2006, according to the Labor Department's preliminary estimate.  That compares with a 0.1% decline in the previous quarter and was double what economists were expecting.

Good work, everyone.  Nice hustle.

Productivity is a magical little economic indicator, because when it grows, it raises the maximum sustainable economic growth rate, while helping to ward off inflation.  If wages grow faster than productivity for too long, we spark inflation and careen toward a wage-price spiral, a self-sustaining little economic nightmare.

Given the high economic growth we're experiencing (above what we perceive to be the sustainable rate) and especially since this morning's report also showed wages growing faster than productivity for full year 2006, we should all be delighted that productivity appears to be picking up steam.  In the fourth quarter, productivity growth outstripped wage growth by 1.5 percentage points, so we're definitely moving in the right direction (despite frittering time away uploading hilarious YouTube videos, sending MySpace friend requests to Presidential candidates, etc.).

Unfortunately, the above framework gets chewed up and spit out slightly differently when viewed through the political lens.  Productivity gains, oddly enough  (or more to the point, productivity gains versus wage gains), are often lamented, directly or indirectly, by our Democrat friends.  From a static, microcosmic, and zero-term perspective, wage gains might seem to be preferable than productivity gains.  (What should you care if you work your a** off and Initech ships a few extra units?)  Your incremental toiling is enriching greedy corporate fatcats, but doing nothing for your hungry and doting family.  Wage gains on the other hand enrich the average working stiff today and are therefore the end to be chased through policy decisions.

The "jobless" recovery maligned by Democrats early on in the current expansionary freight train was chalked up to this very phenomenon - GDP growth through productivity gains.  For the most part, that was an accurate characterization of the early recovery.  But what we saw follow soon thereafter was an period of blistering job creation, driving unemployment down almost worrisomely low.  Amid this job creation, real wages also began to rise (as noted above, almost worrisomely quickly).  If the fourth quarter was a bellwether of things to come, productivity has caught up with (and perhaps surpassed) wage growth, taking the inflationary pressure out of those wage increases, which is all good news.

If that's the case (though it undoubtedly won't all be as neat and tidy as that once we've revised these figures and seen the first couple quarters worth of 2007 data), it'll be a fine case study of why the static, microcosmic, and zero-term perspective is always a foolish one when adopting economic policy.  The economy is dynamic, macrocosmic, and long-term.  If in 2003, instead of lowering investment income tax rates, we'd sought to push wages higher directly (say, by raising the minimum wage), we would've artificially stoked wage inflation, while curbing long-term productivity gains by discouraging people and businesses from putting capital to work.

Thankfully, by recognizing the long-term, dynamic impact of these economic policy decisions, we not only avoided the wage-price spiral toward which we might've otherwise headed, but we've managed to achieve the working stiff benefits (more jobs, higher real wages) falsely promised by short-term static policy-making.  Supply-side economics in action.  Lower taxes, free markets: everyone benefits.  Higher taxes, price controls: no one benefits, other than faux-populist policy-makers selling out our long-term prosperity for short term votes.

Despite this happy situation in which we find ourselves, Congress has an opportunity to screw this up.  It has to pull off a few things in conjunction to really bungle our enviable economic footing, but it's certainly within reach if they make a concerted effort.

First, they need to spark artificial inflation, particularly wage inflation (check).  To really summon the inflation demon, though, they'd also want to push a major consumer cost artifically higher, like healthcare (check).  Even better, they could boost the price of something that not only hits consumers directly, but also serves as an input cost to nearly all other businesses, driving prices higher across the board.  Something like energy prices (check).

Second, to make sure wage growth overruns productivity growth, creating that woeful wage-price spiral, Congress would need to ensure that the considerable strength of the economy doesn't soak up these unnecessary inflationary pressures.  To that end, Congress needs to discourage new job creation (check).

Finally, above all else, they need to make sure productivity growth slows.  Even with all these pieces of the irrational growth-quashing puzzle in place, a policy environment that stimulates productivity by encouraging investment may still yield a pace of economic progress that's able to absorb these several damaging policy decisions.  Prosperity will still be muted and unnecessarily constrained, but we may avoid the nightmarish, self-reinforcing inflationary quagmire.

This final step in the dance of economic disruption can be achieved simply through inaction.  The saving grace that will in all likelihood protect us in the current business cycle from entering a recession and in future business cycles from suffering potentially devastating stagflation, notwithstanding the significant anti-growth measures noted above, is the pro-growth tax environment we've enjoyed since 2003.  There's a reason the Jobs and Growth Tax Relief Reconciliation Act will surely be the single best domestic policy initiative undertaken by this President.  It not only fuels business growth (which in turn fuels real wage growth), but by encouraging investment, it fuels research and development, which leads to technological innovation, which fuels productivity growth.

Yes, productivity growth.  That magical little indicator that staves off price spirals, raises the sustainable economic growth rate, and keeps the inflation demon at bay, providing for our collective long-term prosperity.

The measure "sunsets" in less than 4 years, so it's not even a long period of inaction required by Congress to pull off the final act of this multi-stage feat of economic derailment.   (It's darn near poetic that the best way for Congress to kill long-term productivity is simply to be unproductive.)  All they need to do is wave their hands and try to dazzle you with their sparkly faux-populism, beseeching you in dulcet tones to adopt their static, short-term, microcosmic, anti-fatcat perspective.

Me, I choose to operate under the assumption that we won't fall for it next time, so today, I'm content to revel in the favorable productivity report, in the spirit of which, you should probably think about laying off the blog reading and getting back to work.

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U.S. Workforce Unexpectedly Productive, Despite You Reading This Instead Of Working

Productivity grew by 3% in the fourth quarter of 2006, according to the Labor Department's preliminary estimate.  That compares with a 0.1% decline in the previous quarter and was double what economists were expecting.

Good work, everyone.  Nice hustle.

Productivity is a magical little economic indicator, because when it grows, it raises the maximum sustainable economic growth rate, while helping to ward off inflation.  If wages grow faster than productivity for too long, we spark inflation and careen toward a wage-price spiral, a self-sustaining little economic nightmare.

Given the high economic growth we're experiencing (above what we perceive to be the sustainable rate) and especially since this morning's report also showed wages growing faster than productivity for full year 2006, we should all be delighted that productivity appears to be picking up steam.  In the fourth quarter, productivity growth outstripped wage growth by 1.5 percentage points, so we're definitely moving in the right direction (despite frittering time away uploading hilarious YouTube videos, sending MySpace friend requests to Presidential candidates, etc.).

Unfortunately, the above framework gets chewed up and spit out slightly differently when viewed through the political lens.  Productivity gains, oddly enough  (or more to the point, productivity gains versus wage gains), are often lamented, directly or indirectly, by our Democrat friends.  From a static, microcosmic, and zero-term perspective, wage gains might seem to be preferable than productivity gains.  (What should you care if you work your a** off and Initech ships a few extra units?)  Your incremental toiling is enriching greedy corporate fatcats, but doing nothing for your hungry and doting family.  Wage gains on the other hand enrich the average working stiff today and are therefore the end to be chased through policy decisions.

The "jobless" recovery maligned by Democrats early on in the current expansionary freight train was chalked up to this very phenomenon - GDP growth through productivity gains.  For the most part, that was an accurate characterization of the early recovery.  But what we saw follow soon thereafter was an period of blistering job creation, driving unemployment down almost worrisomely low.  Amid this job creation, real wages also began to rise (as noted above, almost worrisomely quickly).  If the fourth quarter was a bellwether of things to come, productivity has caught up with (and perhaps surpassed) wage growth, taking the inflationary pressure out of those wage increases, which is all good news.

If that's the case (though it undoubtedly won't all be as neat and tidy as that once we've revised these figures and seen the first couple quarters worth of 2007 data), it'll be a fine case study of why the static, microcosmic, and zero-term perspective is always a foolish one when adopting economic policy.  The economy is dynamic, macrocosmic, and long-term.  If in 2003, instead of lowering investment income tax rates, we'd sought to push wages higher directly (say, by raising the minimum wage), we would've artificially stoked wage inflation, while curbing long-term productivity gains by discouraging people and businesses from putting capital to work.

Thankfully, by recognizing the long-term, dynamic impact of these economic policy decisions, we not only avoided the wage-price spiral toward which we might've otherwise headed, but we've managed to achieve the working stiff benefits (more jobs, higher real wages) falsely promised by short-term static policy-making.  Supply-side economics in action.  Lower taxes, free markets: everyone benefits.  Higher taxes, price controls: no one benefits, other than faux-populist policy-makers selling out our long-term prosperity for short term votes.

Despite this happy situation in which we find ourselves, Congress has an opportunity to screw this up.  It has to pull off a few things in conjunction to really bungle our enviable economic footing, but it's certainly within reach if they make a concerted effort.

First, they need to spark artificial inflation, particularly wage inflation (check).  To really summon the inflation demon, though, they'd also want to push a major consumer cost artifically higher, like healthcare (check).  Even better, they could boost the price of something that not only hits consumers directly, but also serves as an input cost to nearly all other businesses, driving prices higher across the board.  Something like energy prices (check).

Second, to make sure wage growth overruns productivity growth, creating that woeful wage-price spiral, Congress would need to ensure that the considerable strength of the economy doesn't soak up these unnecessary inflationary pressures.  To that end, Congress needs to discourage new job creation (check).

Finally, above all else, they need to make sure productivity growth slows.  Even with all these pieces of the irrational growth-quashing puzzle in place, a policy environment that stimulates productivity by encouraging investment may still yield a pace of economic progress that's able to absorb these several damaging policy decisions.  Prosperity will still be muted and unnecessarily constrained, but we may avoid the nightmarish, self-reinforcing inflationary quagmire.

This final step in the dance of economic disruption can be achieved simply through inaction.  The saving grace that will in all likelihood protect us in the current business cycle from entering a recession and in future business cycles from suffering potentially devastating stagflation, notwithstanding the significant anti-growth measures noted above, is the pro-growth tax environment we've enjoyed since 2003.  There's a reason the Jobs and Growth Tax Relief Reconciliation Act will surely be the single best domestic policy initiative undertaken by this President.  It not only fuels business growth (which in turn fuels real wage growth), but by encouraging investment, it fuels research and development, which leads to technological innovation, which fuels productivity growth.

Yes, productivity growth.  That magical little indicator that staves off price spirals, raises the sustainable economic growth rate, and keeps the inflation demon at bay, providing for our collective long-term prosperity.

The measure "sunsets" in less than 4 years, so it's not even a long period of inaction required by Congress to pull off the final act of this multi-stage feat of economic derailment.   (It's darn near poetic that the best way for Congress to kill long-term productivity is simply to be unproductive.)  All they need to do is wave their hands and try to dazzle you with their sparkly faux-populism, beseeching you in dulcet tones to adopt their static, short-term, microcosmic, anti-fatcat perspective.

Me, I choose to operate under the assumption that we won't fall for it next time, so today, I'm content to revel in the favorable productivity report, in the spirit of which, you should probably think about laying off the blog reading and getting back to work.