2009 Stimulus Check

By Gerard Jackson

Falling Productivity Is a Bad Omen

That the recorded fall in productivity took so many economists by surprise is a clear demonstration of just how defective Keynesian thinking is. However, Paul Kasriel, chief economist at Northern Trust Co, is one economic commentator who predicted falling productivity, saying that “productivity is not as miraculous as some had thought”. Why? Because he applied Austrian analysis.

I have explained a number times how credit expansion distorts production, eventually causing manufacturing to contract while still stimulating consumption. In the final phase of the boom we find labour costs rising even as profits are squeezed and manufacturing output falls. This is precisely what is happening now. A phenomenon with which the classical economists were familiar is causing confusion among our mainstream economists.

Now for the facts. The Labor Department reported that labor costs leapt by a 5.2 percent rate in the first quarter At the same time productivity fell by 0.1 percent, taking the majority of economists by surprise. The last time labor costs exceeded 3.5 per cent was in 1990 when unit cost increased 6.1 per cent in the second quarter and then continued into the third and fourth quarters. For those who have forgotten, the economy slid into recession in the third quarter of 1990.

Is the economy following the same pattern as 1990? I fear so. Bob Barbera, chief economist at Hoenig & Co. in Rye Brook, New York said: “Productivity is comporting itself in a traditional cyclical pattern. . . . This is painfully old news. Companies have already told us profits are lousy, and the government is finally getting around to figuring it out in the macro data.” If government advisers and the Fed has have used the correct economic approach in the first place they wouldn’t now be trying to figure out what happened.

Continued at The U.S. Economy Part 2