Productivity holds key to economic growth

By MORRIS R. BESCHLOSS

PVF & economic analyst

One of the most important and least understood aspects of a vibrant global economy is productivity. This has been the main key for the United States maintaining solid economic growth with moderate inflation for the past decade.

Simply put, productivity is the cost of each unit produced by all sectors of the economy, whether industrial or service. It primarily includes labor costs and benefits, material and overhead related to each unit’s production cost.

Productivity has been the main ingredient that has juiced up America’s economic growth while other mature economies, such as those of Western Europe and Japan have been lagging. This happened at a time when the emerging dynamics of Southeast Asia, Eastern Europe and Brazil have leapfrogged their Western antecedents‚ productive capability.

The easy answer to America’s ability to maintain a surprisingly strong productivity increase is the United States’ ability to avoid the overbearing welfare packages that have been borne by the Western European nations, which are heavily industrialized. These have been saddled with inflexible unions, obdurate in giving up the benefits gained by huge contract deals in the heady 1950s, 1960s and early 1970s. These organized labor-driven deals took place before the Asian tidal wave squeezed major European companies profits and limited their competitive capabilities.

Granted that the major U.S. industrial companies and contractors came under similar pressure, but America was spared by three significant differences:

1. U.S. high technology leadership, both on the shop floor as well as the back office, allowed for a cut back in a substantial number of employees in both manufacturing, as well as white- collar personnel. At the same time, most companies were able to increase their production capacity with significantly less employment.
2. The major U.S. shift away from employment in the industrial sector to an all time post World War II low by the end of 2006, reduced the pressure of tough, high-priced organized union contracts precipitously in the last 50 years. This resulted in lower wage and benefit increases, and a significant tilt toward small business, which avoided the impact of organized labor pressure.
3. The lessened role of the U.S. government in forcing the nation to accept universal insurance and federal pension plans that have saddled most of the Western nations without any recourse from political interference. Government pressure has been the main driver in the primarily Western nations that have embraced this concept.
4. With America’s world leading gross domestic product (75%) increasingly focused on lower paying jobs in the service sector, most of these jobs are in competition with other domestic companies impacted by similar cost factors. This means that undercutting imports do not play a major role in this arena.

America’s industrial sector has the additional advantage of focusing its shrinking industrial base on high technology, military equipment, commercial aircraft, construction machinery and farm equipment that allows the United States to accelerate its 2006 record export total of 1.3 trillion dollars. Two-thirds of American exports are made up of industrial equipment, not made competitively in the nations to which these products are shipped.

As we move into mid-year 2007, leading economist are becoming increasingly concerned that the 10- year run of increased productivity may be rapidly slowing, or coming to an end. This pessimism is fostered by an increasing shortage of labor, caused by accelerated retirements of baby boomers and additional demand generated by a greater diversity of new products worldwide.

Such a trend would usher in an era of higher unit costs spurred on not only by increased wages and benefits, but by expanded use of energy and raw materials in general.

This would put the United States back on the dreaded course of stagflation, with lessened demand accompanied by inflationary influences, not seen in this country since the early 1990s.

Unknown at this point is the rapidity of new product development and the positive influence of the emerging world’s consumer sectors, which might exert a surprisingly strong tailwind on America’s record export opportunities.