Productivity In America Now On Par With Agrarian Slave Economy | Zero Hedge

Productivity In America Now On Par With Agrarian Slave Economy | Zero Hedge

Submitted by Eugen Bohm-Bawerk

In the first episode we showed how the US became an unsustainable service sector based economy from the 1970s onward when service sector employment diverged from manufacturing without a corresponding boost in productivity. In the second episode we laid out the consequences that transition has had on labour in terms of lower wages and benefits. In addition, we reiterated our argument that monetary policy has become slave to the service sector as it has become linked to the much touted wealth effect (capital consumption) that is now an integral part of the American business cycle.

Now it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line.

In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7 per cent.

As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon (see bonus chart at the end).

As a side note, it is worth noting that while the US became the world largest economy already by 1871, Britain held onto the role as a world hegemon until 1945. Applied to today’s situation in light of the fact that China is, by some measures, already the largest economy on the planet, it does not mean it will rule the seven seas anytime soon. In our view, they probably never will, but that is a story for another time.

Cont....