The productivity riddle

Much has been made of America’s superior productivity levels – 20% ahead of Germany and France and over 30% ahead of Britain’s dismal record despite Gordon Brown’s various attempts of boosting it. 

In the past I have always accepted this story. It appeared to be so plausible, as America’s single market of nearly 300 million people offers such huge advantages of scale. Looking, however, at the continuously deteriorating US trade performance one starts to wonder. 

How can one bring a $ 750 bn trade gap (about 7% of GDP) in line with the highest productivity in the world? As the manufacturing sector has shrunk as in Britain to somewhere just north of 15% of GDP, it means that nearly 40% of US manufacturing industries have been displaced by the trade gap.

Apart from “stars” like Microsoft, H&P, Boeing and others there must have been a lot of “dogs” falling by the wayside. The great economist Schumpeter hailed the process of weeding out under-performing companies as the great invigorator of capitalism, but I doubt whether he had it quite on this scale in mind.  

This trade gap is not just with the low-priced countries of the Far East; it is growing significantly with Europe in spite of the dollar’s fall against the Euro. In 1998 the US trade gap was $ 247 bn and the Euro averaged 0.88 dollar – it stands at present at 1.38 - a 57% devaluation of the dollar during which time the overall trade gap has trebled. 

This brings me to the second point of the riddle. How is productivity measured? It can’t just be that it is national output divided by the number of people working in a country and then, for international comparison, the exchange rate between countries is applied? I doubt it, as the devaluation of the dollar would have eaten up any productivity gain over the last decade. So what artificial exchange rates and other fiddle factor are being used here? Are the roughly 12 million “illegals” and their grey output taken in to account?  

There are lies, big lies and statistics. We know that. The real riddle is of course, why the US and for that matter the UK are under-performing so badly in the world markets of traded goods, whilst they have such envious job creation records in the service sector as compared, for instance, with Germany.

The answer seems to lie in three main areas:

Firstly, in a truly globalised economy there is little room for monopolistic or even oligopolistic market structures – there are simply too many players. So money goes where the pickings are easiest – just look at British banking and retailing.

Secondly, to survive in global competition, companies have to invest long-term in products and export markets – there are few fast buck wins to be made here.

Thirdly, the supply of cheap credit has replaced the old-fashioned save-first and spend-later and has let to booms in consumption and asset inflation feeding off each other.

All three have worked hand in hand, as the huge growth in financial services has shown. All three have led to significant economic growth with enormous imbalances worldwide and at home. Is it sustainable? I don’t think so.

If anybody else can come up with some better or additional reasons or comments on the above, I would like to hear from them. 

 

Only finance matters

Forty years ago I was parachuted into Britain by my German employer Jungheinrich to give the thriving British forklift truck industry a run for its money. In 1967 Britain’s forkers exported 40% of their trucks and importers held a miserly 12% market share. The pound stood at DM 10.80. Our prices were high but our quality was good. We starting selling against the Brits – and were hit by the first devaluation of the Pound, got kicked back, started again and then the next devaluation happened. After seven years of hard work and more currency adjustments, our market share had crept up to an unsatisfactory 2%, the company considered sacking me and closing the operation down. Our British competitors defended their turf well.

Then the miracle of North Sea oil production started to get under way, the pound strengthened, Britain enjoyed a boom and we doubled our market share in three consecutive years. So did our foreign competitors. From the mid 1970s onwards oil production displaced manufactured goods output virtually one to one.

Those days are long gone now. Despite being a small net exporter of oil, Britain’s balance of trade is a shocker and the current account deficit, which takes into account the services sector, was in the red in April alone by £3.5 bn. As a sign of the attrition facing the manufacturing sector, Jungheinrich bought the last surviving British forklift maker out of receivership in 1994; but in 2005 the company threw in the towel and moved production to Germany.

Where is the pound today? By previous measures it would have disappeared by now. But no – although it reached its lowest point against the then DM at around 2.20 (around €1.10 in new money) by 1994, it has since been rising towards €1.50 and has been stuck there for the last six years – against a steadily worsening trade performance.

What is the reason for this phenomenon?  It seems that today only finance matters - interest rate differential and spread betting on purchase managers’ indices, housing start-ups, unemployment date etc govern exchange rate movements, not manufacturing or trade. The real world has become irrelevant, for the moment at least.

For those interested in the subject I recommend Dan Atkinson’s excellent book “Fantasy Island”. Although he writes for The Mail on Sunday, he has a good grip on the issues. And unfortunately I have to admit that I agree with his conclusions.  

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