Michael Gentile, Johns Hopkins University:
The U.S. economy’s green thumb has withered brown. While our sheds have been emptied of all their tools and our stables of all their hands, its calloused charm has been gloved for safety. Today, that thumb remains in an upward emblem of boredom, while its longer contemporaries resign themselves to counting harvests that aren’t quite enough. Today, the battle between supporters of loose monetary policy and those of harsher regulation has obscured the danger of declining productivity as well as each side’s hands in it.
In the second quarter of this fiscal year American productivity growth fell 0.6%–its steepest decline since the oil glut of 1982. However, unlike in 1982, we curiously have not experienced a recession as a result. Rather, our most popular reports indicate prosperity—the lowest inflation and unemployment rates in recent history. Forget strikes; hourly compensation rose 3.7% this past quarter.
The often-overlooked kicker, however, dwells in the difference between hourly compensation and productivity: a 4.3% increase in our unit cost of labor. Or in short, what used to cost a dollar to make now costs another nickel. This would be fine if national output grew by the same factor and broke even. Sadly, those shades of growth are distant memories; GDP growth during the second quarter limped in three legs short at a mere 1.1%.
Decreasing productivity means that the same level of output requires increased levels of labor. Record-low levels of unemployment, often praised by the media, do not acknowledge the value that the recently employed fail to add. Like a baker that gets paid to lick the spoon, newly hired employees have been producing revenues that fail to even offset what they cost to hire—a reality that defies the most basic of economic principles.
A phenomenon known as labor hoarding predicts that, during economic slowdowns, productivity declines because employers are typically reluctant to lay off workers when the demand for work dwindles down. Productivity then rebounds when demand upticks and eventually drives each of those employees to manage more demand by themselves. However, reluctance among today’s employers to fire workers has not encountered a closed-door hibernation period; rather, it has sprung a spree of hiring, as shown by the regularity of monthly job additions above 200,000. As a result, more and more people receive paychecks—of increasing value—to satisfy less and less demand.
Another important principle in economic growth theory states that Real GDP per Capita—the most official gauge of a country’s standard of living—will grow in line with productivity in the long term. While business leaders have time and again fumbled the secret to economic growth, its formula has remained the same. We’ve confused the variables as having changed after 2008 and, even further, inserted our own—namely regulation and near-zero interest rates.
Over the course of the Obama administration, federal prohibitions and oversight has littered the American marketplace. Regulatory agencies have created jobs that, though serving their purpose, fail to add to the economy. As more regulations have been passed, companies are increasingly required to enlarge their compliance and operation staffs, creating jobs that do not add to the economy. In these regards, productivity has fallen—not because of distractions or aging equipment—but because now employees must do things other than their jobs. Of all the buildings that these hall monitors have been assigned to, no hallways have been congested more than those of the banking industry.
Although Wall Street’s role in causing the Great Recession warrants certain caution, the extreme regulation of the financial sector has stagnated the flow of capital and, as a result, the pulse of capitalism. Even while the biggest banks toil under their new bureaucratic and capital requirements, they are still the only ones in the sector with enough hiring power and investment volume to bear its brunt. Regional banks and privately-held brokers have seen their margins implode and, in turn, reinforced the market share of the unfailables at the top. Instead of the muckraked alternative, big banks have largely bunched-up in their spheres.
Years of accommodative monetary policy have also encouraged the bunching-up of elite corporations in other spaces. As a result of extremely low interest rates, the reward of lending has capsized and is now only salvaged in large deals of debt. Large lenders thus view small and medium-sized businesses as not worth the risk. Instead, they lend disproportionately to well-established institutions in later stages of their diminishing returns.
The law of diminishing returns states that each subsequent unit of input yields ever-decreasing units of output—the bigger you are, the harder it is to grow. Thus, as lenders take the safe bet with large corporations, they only add small profits. On the other hand, when lenders issue loans to rising businesses, every dollar can make a sizable difference in their production. In this regard, betting on small businesses makes the economy more efficient. Low interest rates—in paradox to the investment they aim to foster—restrict the market for loanable funds to the top and cause inefficiencies to fester. And as with all inefficiencies, certain people benefit as the collective economy starves.
What makes these problems so difficult to diagnose is the tug-of-war that ensues between the proponents of them both. Those most cautious of where the economy is heading—the pro-regulation ranters—often trivialize the whims of the investment community—the low-rate beggars. As a result, they entrench the normal of the economy in the middle, an area to which it is quite foreign. Never before have rates been so low for so long. Never has regulation been so stifling. And most importantly, never has productivity been so lackluster. While their correlations are their own to behold, it’s alarming how far we’ve come from the free markets that built this country. And how distracted we are from noticing.
In gauging the effect of regulation and monetary policy on our future, it is important to note that market mechanisms did not cause these anomalies. Free market forces did not originate with collars or central banks; we ourselves originated them, and if we mitigated them as priorities for long enough, the dynamics of capitalism would undo much of our work. This is not to say that regulation and the Fed do not protect us in ways that are crucial today, but rather that productivity growth is a choice with a clear set of trade-offs. And the fact that we made a choice in 2008 does not mean that that choice is still the best one today.