39. Labor Productivity- Part 2
In this paper we will explain Labor Productivity and why it is so important to create wealth and prosperity for our lives. Next, we will look at what non-farm labor productivity averaged over the first three years of Trump’s Presidency and compare it to the first three years of Biden’s Presidency. We will look at who benefited and who lost and attempt to quantify any difference. Finally, we will talk about what the future may hold for labor productivity and look at China’s for a comparison.
What is Labor Productivity? To have a basic understanding we have to look at how its derived. Labor Productivity is obtained by dividing total output of the economy by the total hours worked then comparing the rough number to see if it went up or down and by what percent. Gross Domestic Product (GDP) is used as a proxy to measure the total output of all goods and services, and hours worked is used as a proxy to measure Labor Cost. The Bureau of Labor Statistics (BLS) releases the measure of non-farm Labor Productivity quarterly, and annually. This is a simplification of the actual formula; however, it shows the inverse relationship between adding costs (more labor hours) and lower productivity; or conversely reducing costs (fewer labor hours) and adding productivity given a constant output. You get a rough number that you compare with prior periods to see the percentage change, the higher the percent increase the more social wealth increased. From 1947-1967 Labor Productivity increased at the rate of 3.2% a year. After WWII the country was on a growth spurt. After 1967 there have been some significant moves, both down and up in Labor Productivity, which we will briefly discuss but the average growth since 1967 has been 1.5% a year.
For the three-year period of 2017, 2018 & 2019, President Trump’s Average non-farm Labor Productivity was 1.96% a year which was nearly a half a percent above the 50-year average post 1967. During the three-year period of 2021, 2022 & 2023, President Biden’s non-farm Labor Productivity averaged .5% which was 1% per year below the average and 1.46% a year below President Trump’s. We are not counting 2020 because COVID caused many to leave the work force, therefore the denominator was understated and when we divided it into GDP the Labor Productivity was overstated at 5.4%.[1] So, during the two groups of three years why was president Biden’s Labor Productivity 1% below the average and 1.46% below Trump’s? Over three years that was a loss of 3% below the average and 3.6% below Trump’s. In dollars how much money would that have been? More than a trillion dollars of lost production, why? Also, during Biden’s three years we have seen significant declines in the rate of increase in hours worked. In 2021, hours worked increased 5.9%. In 2022 the increase declined to 4.1% and in 2023 the increase was only 1.3%. Should this rapid decline be concerning?
Maybe the huge printing of money by the Federal Reserve in 2020 and 2021 supplemented by the huge spending tsunami began by Trump who signed the Covid Relief Program on December 27, 2020 for $2.3 trillion. Subsequently the Biden administration enlarged the spending tsunami by passing three “signature” legislations; the Infrastructure Act, the Inflation Reduction Act, (1.9 trillion) and the Chips Act, (730 billion), (2) in addition to these Student Loan forgiveness (155 billion) funding for Ukraine ($175,000 billion), illegal immigration expense $340 billion. None of which is money we have. President Biden approved $4.3 trillion of spending increases. The Vice President Kamala Harris cast the tie braking vote in both the Inflation reduction Act and the Chips Act.
First let’s look at the Federal Reserve’s unsolicited growth of the money supply (through printing) this century, measured by changes in the money supply(M2). If our politicians are going on a spending binge, they have to have access to money. Artificially low interest rates encouraged the spending binge. What better way than to have the Fed print the money out of thin air and hold the interest rates artificially low so the political class is tricked into believing it will be able to pay the loans back.
The period when Ben Bernanke was the Chairman of the Federal Reserve from February 2006 up to January of 2014, M2 money supply grew from $6.7 trillion to $11.1 trillion. Mr. Bernanke oversaw an 84% growth in the money supply as measured by M2 in eight years! Growing the money supply at a rate that outstrips economic growth is called debasing or devaluing the currency. His practice of holding interest rates low coupled by his liberal printing of money are policies that both Janet Yellen and Jerome Powell adopted till present. Now, after Bernanke, the M2 money supply has grown to $21 trillion for a total increase over 18 years of 312% while the economy grew 201%. Money outpaced economic growth by 50%. (3)
“There are three factors of production, labor, land and capital, adding additional labor and capital to a fixed piece of land generates successively smaller increases in output which eventually go to zero or turn negative.” (3) When our Federal Reserve becomes unhinged presenting unparalleled amounts of capital and artificially lowering interest rates, eventually the initial surge of activity goes to zero and turns negative. This is the Economic Law of Diminishing Return.
During 2023 China had Labor Productivity of 4.6% significantly above our rate but also significantly less than the rate they had four years ago. Although China is working from a low base, they have a very fast rate of building wealth and prosperity as is evident by their labor productivity.
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(1) Bureau of Labor Statistics (BLS) provided the following Non-Farm Labor Productivity Numbers 2017-1.8%, 2018-.5%, 2019-3.6%, 2020-5.4%, 2021-.6%, 2022-(-1.8%), 2023-2.8%.
(2) Committee for a Responsible Federal Budget
(3) Numbers taken from Fred Economics, M2 Graph Saint Louis Fed
(4) David Ricardo in his essay “The Influence of a Low Price of Corn on Profits”, 1815.