Tags: productivity | investment | wealthy | competition

Welfare for the Wealthy Has Undermined US Productivity

By    |   Friday, 01 Aug 2014 08:06 AM

U.S. productivity has fallen precipitously since 1960, and future prospects do not look promising.

Since 1960, consumption as a percentage of the economy has grown significantly, from roughly 45 percent to 70 percent, while the level of investment has fallen greatly. By 2011, business cash flow invested in any form of capital asset reached its lowest level since 1938, according to Alan Greenspan, former chairman of the Federal Reserve.

Long-term investment functions as a key catalyst for innovation, productivity and economic growth. Innovation began its decline more than 50 years ago. When innovation falls, the development of products and services, as well as the capital goods used to produce them, plummet. This process is extremely labor intensive and undermines employment, productivity and income growth, which impacts the lower socioeconomic strata most negatively.

As investment as a percentage of the economy fell, so too did the turnover of money. Since 1980, the rate that money changed hands fell approximately 60 percent.

Following World War II to 1973, productivity averaged 2.8 percent annually. It fell precipitously to 1.2 percent from 1973 to 1979, rose to 2.6 percent between 2000 and 2007 and plummeted to 1.6 percent from 2007 to 2013. Last year, it was 0.3 percent.

As innovation declined, competition fell. This empowered greater profit margin potential. Profits as a percentage of the economy have increased steadily since 1975, according to Edmund Phelps, the 2006 Noble Laureate in Economic Sciences.

The lack of competition in real goods and services caused a drop in demand for business loans, while that for arbitrage and speculation of financial assets soared, increasing the prices of bonds and equities and lowering interest rates. Real interest rates are now negative, since inflation exceeds the nominal rate of return.

These dynamics have caused a tremendous level of wealth inequality, which has undermined economic innovation, productivity, employment, income and growth.

The lower economic strata experienced fewer employment opportunities due to low levels of investment and lower investment income due to low interest rates. Meanwhile, wealthy proprietors and shareholders realized large corporate profits and enormous capital gains. Moreover, the concentration of wealth increases with financial arbitrage, since it is close to a zero-sum gain.

This disparity is not sustainable, since there comes a point where the masses can no longer afford the products produced by the wealthy, and eventually surplus wealth dries up.

The principle reason for the lack of investment has been the creation of a protectionist environment by the government, Phelps explains, where wealthy donors influence legislation to reduce competition and foster industrial policy that favors specific interests.

Productivity increased gradually from 1750 through the mid-20th century. Unfortunately, future prospects are dim due to the negative impact of demography, education, inequality, globalization, energy/environment and consumer and government debt, according to Robert Gordon, a professor of economics at Northwestern University.

Term limits for politicians at all levels would afford an environment that promotes more competition and access to opportunities, thereby unwinding some of the most egregious protectionist government policies.

In addition, liberals and conservatives alike believe my tax proposal is fair, effective and elegant in its simplicity. In my view, it would increase investment, innovation, productivity and capital inflows, while balancing the federal budget.

It's time for a real change in how the United States conducts its business.

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U.S. productivity has fallen precipitously since 1960, and future prospects do not look promising.
productivity, investment, wealthy, competition
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2014-06-01
Friday, 01 Aug 2014 08:06 AM
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