the productivity mirage:
Quantifying Import impact on productivity measurement.
According to Chen/Woods theory (http://pages.prodigy.net/ashino4112/articl01.htm), imports are resold in the importing country at a greater margin than provided for the exporter. If the exporter accumulates bonds and currency of the importer, then the exporter will see no benefit from exports as goods leave the country but none come in to offset the imbalance. True wealth is given away by the exporter for nothing, at least until a long term trade deficit allows the former exporter to import an equivalent amount of goods. The quality of the currency accumulated makes for the difference in quantity of goods and services received when the currency and investments in the importer are cashed in. Since the driver of trade imbalances are overvalued currencies at the importer or undervalued currencies of exporters, obviously the one sided trade can only end when the exporter has wasted away much of its wealth, or the importer has run deficits to levels that overwhelm the willingness of the exporter to accept more of the importer's debt. Interest rate policies of central banks are usually the culprit in this matter, as they may drive investment flows in one direction, making necessary the excess export and import situation.
As presented above, the importer enjoys a greater gross margin on the imported product than the exporter may realize in export. In part, this has to do with the inflated distribution cost in the importing country because of overvaluation of the currency. Thus the $2 comb set leaving the Chinese factory is a $3 part of a shipment arriving at San Diego. By the time your daughter buys it for $10, your economy registers in GDP, +$10 in final sales, -$3 in imports for a +$7 in GDP. The GDP improvement to import ratio is greater than two, in this case 2.3.
The numbers for other products vary greatly, but the pattern is similar. The $1.2-1.3 trillion of imports this year are probably directly responsible for some $2 to 2.5 trillion of GDP. Perhaps more.
Viewing the greater margins available in the importing country, to a great extent, as a result of a currency valuation imbalance and understanding that retailing and distribution are still very inefficient relative to manufacturing, one comes to the observation that imports raise apparent productivity because sales per employee increase as one goes from the production floor towards the final consumer. Also, the closer in function the production floor is to the retail space, so the higher its apparent productivity. If through marketing and proximity a seller can gain advantage in assembly of imported major parts to order, the producer can win final sales away from the offshore integrated manufacturer who makes the same parts and assembles them abroad. In the high technology arena, time to market is key, as are key design elements. By hiding costs through the use of employee stock options for compensation, a local in the importing country can use the high valuation of his stock, driven by artificially low interest rates at the exporter country, to subsidize the production of final product, be it software or hardware. The content of the product will, increasingly come from exporting nations, and the producer's action may be but little beyond a glorified twist of a screw driver, advertised ad nauseum.
In attempting to quantify the order of magnitude of the effect of importation on apparent aggregate productivity, it is possible to observe a direct relationship to the trade deficit. The end result is that the productivity improvement observed is not as strong as presented by aggregate data. The 4% level in the government statistics can be primarily attributable to the great increase in imports. The improvement in net productivity is much smaller, on the order of 1.8% since the technology revolution began affecting the economy as a whole. Much of the rest of the improvement has to do with normal cyclical behavior of productivity, the result of normal rise in capacity utilization during boom times.
There is another measure of volume increases in trade flows that stems from the improvement of the trade weighted dollar. The trade weighted dollar measure shows improvement consistently because of the attempts by European, Arab Oil and Japanese holders of US debt to retain value in the dollar by creating dollar denominated debt in emerging economy countries that actually produce something, as opposed to the US which gains foreign income through the use of international protections for grossly overvalued intellectual property. This is discussed elsewhere in some detail. For the purpose of this discussion, one need focus only on the fact of the broad trade weighted dollar index being in a rising trend as highly indebted emerging market economies attempt to extricate themselves from dollar denominated debt through devaluation of their currencies and subsidization of exports. The impact on the index of US price inflation is that of amplifying the trend through the US expansion of monetary aggregates, also known as monetary expansion and money printing.
Adjusting for this debt driven increase in the value of dollars, the import volume into the US can be estimated in relationship to these aggregates. This is given in the figure below. The growth rate of the volume of goods shipped to the US has remained near 15% for most of the 1990's. As the slightest and most cursory glance at the chart will show, the United States enjoys a booming economy when the currency is gaining ground. This occurs when central bank controlled interest rates in the US are higher than those in its creditor nations. This leads to the odd conclusion that raising interest rates in the US actually prolongs the boom rather than threatening it, because it causes massive flows of liquidity into the US financial system, lowers import price inflation, increases apparent productivity, and prompts further spending by the consumer. For those who view the US as the New Rome, this great stream of imports is the spoils of war waged by an economic empire plundering the world, this data would come as no surprise.
If the transition to off shore production is considered to be the source of the productivity boom of the "New Economy", then what remains of the productivity increase that is not attributable to the importation of other nation's productivity, is summarized in the figure below. While the published government figures of the productivity index show a rise of nearly 70% since 1974, the actual rise in productivity is between 0 and 10 % for the period. The lower values are consistent with the life experience of anyone in the working class and the middle class. This experience of declining reward for effort coincides with the Reagan shift to having workers pay for their benefits, while promoting steep subsidies of corporations, particularly in the earlier stages of corporate growth. The record of this transition is chronicled well by Batra in his books "The Myth of Free Trade", and "The Crash of the Millenium". Though Batra does not pay attention to the monetary root cause of the problem, he does record its effects with great powers of observation.
Historical timelines for the actual levels of productivity in the US may be traced back to the introduction of accounting computing by IBM and later EDS in the late 1960's. This cleared the accounting pools of the great corporations and some government agencies. Automation of scientific work began even earlier and entered mainstream engineering by the mid 1970s. By 1980, the ordering systems and inter-corporate billing were computerized to a great extent, as had occurred in banking and finance in the 1970s. By this time, PCs were available, Digital's Rainbow, Commodore 64, Sinclair, Amiga, and others were available, and were quickly entering mainstream secretarial work. By the mid 1980s office automation was well underway. Computer controlled manufacturing equipment and processes were the hot items of the late 1970s and were mainstream by the mid 1980s. Business to business networking within and without the internet became mainstream five years ago, as were supply chain management and inventory control. The current process is one standardization and inclusion, whereby the final applications of old technologies are coming to an end. The productivity gains are still minor because of the low level of brainpower produced by the American public school system can not be sufficiently ameliorated by the computers that have come to replace missing intelligence.
Inventory management in the current Just In Time manner was not attractive until high real US interest rates made the holding of inventory unattractive. Prior to this, inventory was a profit center, not a cost center. Now that the world has organized away the inventory that cushions supply disruptions and price inflation, we are quite defenseless against them. This is the best chance for Murphy's Law to demonstrate itself with a cruel spate of price inflation.
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In summary, the productivity boom is as much a mirage as the money that drives the apparent success. There is not productivity boom. There is an import boom. The imports are not driven by the great growth of the American economy. They are driven by debt of the countries producing this wealth. The imports, in the view of the advocates of the New Rome theory, are a payment of tribute by vassals. The result of this distortion driven by the monetary system is a decline in real living standards in all of the indebted world, and in the United States. Indeed, reward has been divorced from effort. There have been enormous strides in productivity around the globe, few of them came in the United States. It has been the seigniorage of the dollar reserve system granted to the US without economic consideration, that allowed the import of productivity from abroad and the superficial appearance of health in the economy. |
