Work and Pray

“Work and pray, live on hay, you’ll get pie in the sky when you die”
- Joe Hill (1912)

This weekend we began thinking about labor productivity. I’m not sure why. Perhaps it is because it seems everyone I talk to is doing the work of two or three people these days. Businesses began reducing headcount aggressively in late 2008. Some were preparing for the expected recession following the lock up of the financial system. Others were hedging unknown action by the new administration that was not expected to be very kind to businesses. Whatever the reason, businesses downsized dramatically in the face of collapsing demand (also paradoxically contributing to that collapse) well ahead of the event. Those lost jobs now total over 8 million. The effect can be seen in corporate profits, which held up much better than anyone expected.

When demand began to stabilize, their actions also produced a jump in labor productivity which is portrayed in the chart nearby. Non-farm productivity is measured by the hours worked (or more likely the hours paid for) compared to the total output of GDP. Companies have a powerful incentive to continuously apply technologies to improve their processes and invest in capital equipment to make their workers more efficient. This allows them to reduce prices, tap into that elasticity of demand and increase profits at the same time.

You can’t see it in the chart, but a longer time series will show there was an inflexion point in U.S. productivity right after Y2K. Part of this was a review of computer systems in expectation of some date-change calamity. The review made people realize how their systems weren’t being used effectively and they made changes. The other driver was, of course, the Internet. That upward trendline is still in place today. Many believe, as I do, that we have a long way to go before the benefits of the Internet are fully realized.

 

The recent jump in productivity does not have much to do with capital investment or improved processes. Faced with dropping demand, sometimes companies just shrink. After a 10 percent RIF they tell the team that, “We’ll have to do more with less to get through this.” With jobs scarce and household budgets under pressure, the “team” doesn’t have much choice in the matter. People are accustomed to this. The baby boomer generation, faced with intense competition from their large demographic cohort, works fully 20 percent more hours per week than their parents did. They also work 32 percent more hours than the average European works today.

All this had us wondering about similar measures of productivity in the government sector. Has the government sector made progress similar to the private sector through capital investment and aggressive use of the Internet to capture efficiencies? As we discovered, it is not so easy to measure. There is no revenue or product to consider. The output is a collection of services provided like collecting taxes, defending the country, distributing food stamps and arranging congressional “fact finding missions” to lush tropical islands. It is also hard to assess what economists call hedonic adjustments. Those occur when a product or service might be more expensive (as our government certainly is), but the quality is superior. Our military is certainly far superior to the one my high school buddies joined to fight the war in Vietnam.

One way to think about government productivity is to compare it to the number of people served and the overall cost of everything (inflation). We’ve done that in the chart nearby, which matches the growth in the federal budget against the product of population growth and inflation. The states with the best managed budget process use this measure to limit excessive spending by politicians hoping to curry favor with their constituents back home.

 

Many readers will note that the annual budget only captures a small portion of the actual costs of government and that is clearly true. For example, there are about $107 trillion in unfunded committed future entitlement benefits. A business would be required to recognize that liability and make annual contributions to fund the eventual payout. Those payments then become part of the annual operating expenses. In government we just pretend those liabilities don’t exist or at least that they won’t be a problem until the current crop of legislators is no longer seeking reelection. As you can see in the chart, even without counting funding for future entitlement costs, federal spending has far outpaced both population growth and inflation.

One of the worries in Washington is that the current higher level of productivity in the private sector will be maintained even as the recovery accelerates. In effect, those 8 million jobs may be lost forever. Maybe businesses could be a little less productive and hire more people. This is a notion peculiar to the French who tried to increase the number of jobs by making it illegal for people to work more than 35 hours a week. Years ago I was syndicating a bank deal in Europe and was surprised to discover that the European bankers were unionized and they had hourly work rules that brought our conference call to an abrupt end.

If business productivity is a barrier to increasing payrolls, then I suppose we should be thankful that government is woefully inefficient. It is a testament to the Keynesian job creation scheme whereby 50,000 people dig holes in the ground and another 50,000 fill them up everyday. So the next time you are standing at the post office counter and watching in fascination as assorted stamps, stickers and notations are applied to your parcel, just tell the clerk to take his time. You are witnessing job creation in progress.


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