How Much Does Productivity Matter?

Today I had a discussion with +David Correia and the topic of "jobs moving overseas" came up. It was a simple discussion about how sending jobs overseas is killing America. While this will not be anywhere near an exhaustive article on the subject, that is a topic frequently discussed and not as ominous as might seem. This is also one that is pervasive in the minds of the public, I believe primarily because politicians believe it to be a winning notion to put forth.  While I am not an economist I will tackle an aspect of this that is generally not discussed and has great bearing to what extent it happens and will go on into the future. 

First some jobs are moving over seas, to build things we used to produce here. That is true but we ourselves are also producing things and exporting them as well. As a matter of fact US exports have doubled in 10 years. So we are still producing stuff the rest of the world wants, and one has to believe that we get more by exporting it than consuming it locally. The reverse also must be true, it is cheaper to let others produce it and import it rather than produce them domestically. This is just common sense. On the other hand imports have also risen over the last 10 years, though at a slower rate. The gap according to the numbers from January 2003 till January 2013 shows are narrowing over time. The problem is that both the staring point and end point for imports are much higher, so the absolute difference has still risen from 400 billion to 600 billion. 

While the number don't lie, there is still another story to be told. Low labor prices are not the only cost that matter to a company, usually the stated cause. But what is often over looked is the productivity of that labor. One real world example of this I ran across while researching another topic I also enjoy, gardening. Here is a great example of how much productivity can matter. Spain produces 8 million tons of Olives per year but only a little over 38 tons per HA. In the US we produce only 172,000 tons but produce 129 tons per HA

If the economics continue to hold for a period of time, I would imagine US production to continue to grow in market share over time. Or at least grow faster than the overall demand for olives. Exports should drop if consumption were to stay the same. US production would supplant the previous imports. The only thing probably holding back this trend from accelerating is finding the good land and the large initial cost of set up. But you can bet the existing US producers are looking far and wide to find land suitable for olive growing to exploit the productivity advantage they currently enjoy. Spain & Italy, the largest producers, already been growing olives for a very long time and have probably had the land paid off generations ago and can afford to be much less productive because the cost of capital is next to zero for them.

While the amount of acreage dedicated to olive growing in the US has held firm for almost 40 years, the amount produced per acre has skyrocketed from five thousand tons to seventy one thousand tons. The value has also risen by more than ten times, with the 2011 crop being worth over fifty one million dollars.  Anecdotal evidence here in Florida tells of a growing group of farmers starting olive groves, with many already in production.

This can and does work for all industries. The productivity of the labor can matter more than the cost of the labor. So the US can be the largest export nation again, and more importantly, significantly decrease our trade deficit over time. The biggest driver of that should be focused on productivity growth and not inflating the currency to drive down the relative cost of labor. That in the long run will make us poorer not richer.

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What Is The Real Inflation Rate?

Gold Currency

I’ll tell you what I think about the way
This city treats her soundest men today;
By a coincidence more sad than funny,
It’s very like the way we treat our money.
The noble silver drachma that of old we were
So proud of, and the recent gold coins that
Rang true, clean-stamped and worth their weight
Throughout the world, have ceased to circulate.
Instead the purses of Athenian shoppers
Are full of shoddy silver-plated coppers
Just so, when men are needed by the nation,
The best have been withdrawn from circulation.
—Aristophanes, The Frogs, 400 BC

I fail to see how the Federal Reserve and the Federal Government can still get away with saying that the is "No" or little inflation. There is certainly good reasons for why they would want to hide this fact from the people of America, but why so many fall for it is beyond me. Many are completely unaware of the real rate of inflation and no doubt fooled by the government when they tell us the reasons lie elsewhere. The latest inflation report that came out on 2/20/2013 reported that January 2013 core inflation was .2%. Even according to that number, that would equate to 2.4% for 12 months and above the 2% target set by the Federal Reserve. That is not zero inflation as some have gone as far to say. As a matter of fact, that is a 20% miss of their target. While only one month, we have had many months above 2%, and year over year inflation in December 2012 was 4.2%. The number they continue to target actually sets an anchor in many people's mind for what to expect. Which stands in sharp contrast to what we actually see. If you earned $50,000 in 2003, you would need to be earning $62,389.67 today to buy the same goods as you did in 2003. Does that sound like "no" inflation to you?

If we instead looked at what we pay for or what the inflation rate might look like if they have changed the way they calculated it, then a different picture would emerge. Each time they have changed the way they calculate inflation, the number seem to mysteriously drop. Funny how they never seem to find anywhere when they have understated inflation. They have actually changed they way inflation is calculated 20 times since 1978. In 1983 they introduced owners equivalent rent, which immediately dropped what was 10.3% inflation for the previous 4 years to 3.3% for the next 4 years. Seems like a magic trick right? Do you think the people earning wages at that time actually saw the increase in prices of the goods and services drop by almost a third during that time? I don't think so. This is a fairly complicated change and if your interested, you should look up "Owners Equivalent Rent" to find out exactly what it is and why they made this change.

The next two big changes also had dubious value, and many people have never heard of nor understand they they are in use. Hedonics was introduced in 1998 and is a means by which the government actually DECREASES the price of items, even if the price you paid was higher or the same. The reasoning is that if the items is of better quality, than the value you receive is greater and should be accounted for with a lower net price. Even if the item of lower quality isn't even available to buy anymore. Here is an example: if you bought a base model computer with 20 GB of hard drive space with 1 MB of ram at a cost of $999 in 1998 and the next year that same base model computer had 30 GB of hard drive space with 2 MB or ram for $999 in 1999 the government might use $500 as your price for the computer when calculating CPI. One article i read actually made that claim of Apple computers in the calculation. Isn't it normal for things to get better over time? What does that have to do with the actual price you pay? Remember this goes for all items in the CPI that they can imagine increased in value. Car purchases factor huge in this as the average price of a car is much more than a computer. In 1999 the process of substitution was introduced. This scheme allowed the government to substitute your actual purchase with another like item that cost less. Again even it it wasn't available at the stores in your immediate area. As long as it was available in say Chicago, your purchase anywhere in the city could be substituted. Another example to cement the idea: if you went grocery shopping and while you were there you bought a gallon of ice cream for $4.35 because it was the lowest priced ice cream in the store but 7 miles away there was a brand that you could have bought was $4.05. They would say you bought the cheaper item. Were you expected to drive the 7 miles to get the 30 cent discount? This is all madness, and meant to distort and under report inflation.

If your head is spinning after reading that, than I apologize. By now if you have understood that these measures do nothing but drive down the real inflation numbers, we need to consider; what would they look like if we didn't use these tricks?  Luckily two organization i found actually do just that. The American Institute of Economic Research and Shadow stats. Both use data with the old calculation, and in the case with AIER, they have another formula using the goods and services people buy everyday. The EPI put out by AIER shows that inflation the last three years averaged 5.2%, the CPI was 2.5%. That is double the amount of inflation. If we look at Shadow stats, it shows inflation has been near 10% for the previous three years. They use the methodology in place prior to 1980. Which can only mean one of two things; either the 1970's really didn't have high inflation or the inflation today is really much higher than reported.  I would say it is the latter. Don't believe the CPI data, believe the prices you pay, and place the blame on where it truly lies, the Government and the Federal Reserve.

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