In a report released last week, the Bureau of Labor Statistics (BLS) found that Multi-Factor Productivity rose in only 21 of the 86 categories of the manufacturing industry in 2015. Unlike labor productivity which is more easily calculated, Multi-Factor Productivity measures attempt to take account of all business inputs (including labor). Capitalism is by its nature the combination of all these factors that produces rising living standards and sustainable growth.

The weak results should not be surprising given the business climate of that year. Manufacturing in particular had already been captured by a sustained downturn, overall a low-grade contraction that reduced the demand for output below already weakened levels (going back to 2012). In that sense, productivity is relatively straight-forward and simple.

Combined inputs kept rising in 2015 as compared to prior years, whereas output was less likely to have gained. The net result cannot be anything other than lower productivity. The BLS report, however, doesn’t give us an idea of degree or intensity, merely the broad nature (the number of industries) of the slowdown across the whole sector.

Nor does it attempt to address why manufacturers would remain so apparently complacent in the face of this negative situation. In more typical fashion, faced with reduced output and rising inputs, any rational business would immediately seek redress usually in the form of labor cutbacks. That didn’t happen, of course, as instead manufacturing businesses by and large chose to absorb the downturn in reduced profits.

Such a decision may at first seem irrational, but that might propose instead other factors requiring consideration. To try to answer this question, it is helpful to go back and examine strictly labor productivity in the manufacturing industry.

While economy-wide productivity has presented economists more than a little conundrum, in this sector the disturbance is crystal clear.

Around the start of the year 2012 something changed. What was the usual cyclical recovery from the Great “Recession” had been for industry rather strong. The massive layoffs during the contraction had reduced labor costs finally faster than revenue was shrinking. The result was rapidly rising productivity from a lower level, or what we call recovery.

The recovery portion from 2009 thru 2011 (what there was of it) was different, however, from the one proceeding it. The dot-com recession, by contrast, had provoked a massive outflow of manufacturing capacity way out of line with the mild nature of that cyclical trough. The Great “Recession” had furthered the huge loss of manufacturing jobs, but unlike the middle 2000’s starting in 2009 manufacturing jobs began to resurface.

Many might be quick to attribute that change in direction to “stimulus”, particularly provisions in the ARRA, but what is noteworthy is that manufacturing payrolls kept growing right on through the output slowdown in 2012. Why?

Before that year, manufacturing productivity and even the changes in manufacturing payrolls make perfect (or near enough) sense. In the 1990’s, the number of manufacturing jobs held pretty constant while output gained – the capitalistic combination of capital investment (productive capacity) with labor utility. Productivity rose because there was required fewer workers to produce more goods. The rate of output expansion was at least consistent with a constant level of labor (payrolls).

There was, of course, more to it than that. Already US-based firms had started with a trickle of jobs exported overseas. That turned into a flood during and after the dot-com bust. That does not immediately affect domestic productivity except by way of indirect proxy for the manufacturing environment. In other words, the lower productivity work left for China and India while higher productivity labor remained active within the US.

It also suggests that businesses still manufacturing domestically were quite aware of labor costs. To address it, they used massive but unobserved monetary expansion and global monetary flow (eurodollars) to tap into much cheaper labor elsewhere around the world (as a means to address low productivity in those areas).

After the Great “Recession”, however, we can only conclude that those jobs either started coming back or more so US manufacturers stopped exporting them. This trend was really exposed by the slowdown in output concurrent to the economic downturn in 2012.

Yet, manufacturers kept adding payrolls despite the clearly negative effects on productivity, meaning profitability. Why didn’t they send them back overseas, especially after 2012?

From the perspective of orthodox economics, there doesn’t appear to be any reason. Therefore, economists and policymakers are left stumped. But if we remember what it was that “allowed” low productivity jobs to leave in the first place, easy global money and fluidity, there is no mystery at all. Effective monetary conditions had changed, drastically so. The eurodollar which was hugely damaged during 2007-09, had become after 2011 irreparable.

That meant, at the very least, manufacturers could not rely on steady monetary financing in order to ship out jobs that only a few years before were easily and reliably transferred. That this negative effect on productivity continued right through to 2016 suggests, strongly, the nature of the disruption in global monetary conditions; in other words, manufacturers felt there was little alternative but to keep production here and maintain minimum levels of labor utilization in these lower productivity capacities.

That also, partially, answers why in the downturn of 2015-16 manufacturing employment wasn’t heavily pared back as in typical cyclical fashion. In short, manufacturers couldn’t trim what were already bare levels of productive capacity in labor.

This “dollar” element to what is a big economic drag is not an exhaustive or exclusive explanation. There are other factors that have played various parts, but in this context we see one way in which a damaged monetary system can have a clear negative effect on the real economy; to start to reveal what is otherwise hidden and only surmised.

Because, however, the monetary system in the mainstream of economics is believed quite healthy and reinforced by the four QE’s, this explanation won’t even be considered. Economists and especially Federal Reserve officials are instead obsessed now (after insisting for nine of the so far ten years there would only be a recovery) with the opioid epidemic as if that was a cause rather than effect of a lost decade.

Prescription drug abuse didn’t suddenly appear in early 2012 to the combined chagrin of US manufacturers otherwise trying to hire a recovery into the US economy. The violent end of what was at least a partially repairing eurodollar system did.

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