The Biggest Fall in 60 Years

The Daily Reckoning, June 27, 2019:

“Given the finite ability to service debt outstanding… future economic growth, if we are to have it, will need to be based largely on gains in productivity.”

CNBC, Dec. 7, 2021:

“Labor productivity fell at the fastest rate in more than 60 years in the third quarter, according to a Labor Department report Tuesday.”

It is true, supply chain disorders have played the devil with economic functioning. Equally true, the virus has been working its mischief.

Yet economists had promised us galloping 2021 economic growth after 2020’s tumults. The tumults continue nonetheless.

When will they clear on through? We have yet to encounter a plausible answer.

Trillions More Debt

Meantime, debt levels have streaked to impossible heights since June 27, 2019. The virus and the ensuing monetary and fiscal deliriums were still one year distant.

The United States government has heaped on an additional $6 trillion of debt in the intervening space.

Today’s national debt exceeds $29 trillion.

In 2019’s fourth quarter, the United States debt-to-GDP ratio went at 106% — itself plenty handsome.

In 2021’s current quarter the same ratio runs to 125%.

Private debt represented 218% of GDP in 2019. In 2020 private debt represented 235% of GDP.

We lack data for 2021, yet hazard no meaningful reducing.

And now we learn productivity is plunging at the dizziest rate in over 60 years.

Productivity = Growth

Productivity growth transformed these United States from a stump-toothed backwater into a global behemoth, an economic Colossus bestride the world.

Michael Lebowitz of Real Investment Advice:

“Productivity growth over the last 350-plus years is what allowed America to grow from a colonial outpost into the world’s largest and most prosperous economic power.”

Productivity growth averaged 4–6% for the 30 years post-WWII.

But average productivity has languished between 0–2% since 1980.

Meantime, labor productivity averaged 3.2% annual growth from World War II to the end of the 20th century.

And since 2011? A mere 0.7%.

Even the Federal Reserve Bank of San Francisco stares the problem square in the eyes:

Estimates suggest the new normal pace for U.S. GDP growth remains 1.5–1.75%, noticeably slower than the typical pace since World War II…

A larger challenge is productivity. Achieving GDP growth consistently above 1.75% will require much faster productivity growth than the United States has typically experienced since the 1970s.

Gold and Productivity

What might account for America’s declining productivity growth?

We have previously raised a possibility: Look to Nixon’s 1971 slamming of the gold window.

The gold standard, though a sad caricature of a gold standard in its dying days, nonetheless enforced an honesty.

A wastrel nation that consumed more than it produced would eventually run through its gold stocks.

The fiat dollar, the unbacked dollar, lifted the penalty. It could take things in without sending gold out.

A liberated Federal Reserve finally struck its golden shackles… spread its nets… and ensnared the nation in debt.

In 1970 — the year before Nixon cut the dollar’s final tether to gold — public debt totaled $371 billion. Or in today’s dollars, some $2.6 trillion.

U.S. public debt today exceeds $29 trillion… and fast approaching $30 trillion. Lebowitz:

The stagnation of productivity growth started in the early 1970s. To be precise it was the result, in part, of the removal of the gold standard and the resulting freedom the Fed was granted to foster more debt… over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

“Unfortunately, productivity requires work, time and sacrifice,” he adds.

The Financialization of America

Yet the emerging American economy abandoned the grimy toil of the factory floor and the workbench…. and struck out for Wall Street.

It went chasing after the fast buck — the easy buck. The financialization of the American economy was underway.

Ten percent of GDP in 1970, the finance industry grew to 20% of GDP by 2010… like weeds mushrooming through an abandoned factory.

And as weeds choke a flowering garden, finance choked the flowering of labor…

The bottom 90% of American earners advanced steadily from the early 1940s through the early 1970s.

But they’ve been sliding back ever since — or held even at best. In contrast we find the top 1% of earners…

From 1920 to the early 1970s they lost ground to the bottom 90%.

But beginning around 1980 they went leaping ahead… and began showing society their dust.

Good or Bad?

But perhaps we can declare the race a draw.

Labor’s loss is simply capital’s gain. The economy as a whole comes out even. Money has merely shifted pockets.

Perhaps the transaction even benefits the economy. Capital could wring more productive use out of it than labor.

But has the United States economy benefited from financialization?

A financialized economy demands perpetually expanding credit — debt — to keep the show going.

Servicing that debt absorbs increasing amounts of society’s income. That, in turn, leaves less to save… and to invest in productive assets. Speculation goes amok.

Economists Gerald Epstein and Juan Antonio Montecino have plowed through the numbers. These numbers reveal that financialization is — in fact — economically destructive.

A $22.7 Trillion Drain

Since 1990… these gentlemen conclude the financial sector has drained trillions and trillions from the United States economy:

What has this flawed financial system cost the U.S. economy?… We estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.

$22.7 trillion exceeds 2020 GDP by nearly $2 trillion. 2020 was a locust year, yet the central thesis stands:

Financialization represents a vast economic wastage.

Yet these gentlemen settled upon their $22.7 trillion figure prior to the pandemic. We have seen no update. But we hazard it would be an even greater enormity.

But the Federal Reserve must keep the show running with greater debt yet — else the curtain falls, and the lights go dark.

It is a dreadful cycle. Eventually it leaves the cupboards bare. It leaves the future empty.

Compounding Negative Returns

Average real annual economic growth since 2009 runs to some 2.2%.

Compare the past decade’s 2.2% with the larger 3.22% trend since 1980.

One percentage point may seem a trifle. And one year to the next it is a trifle. Yet year upon year upon year it is not.

Jim Rickards calculates the United States would be $4 trillion richer — had the 3.22% trend held this past decade.

Run it 30, 50, 60 years… Jim concludes the nation would be twice as rich over a lifetime.

Productivity is likely the lone way up. And productivity has just plunged at its greatest rate in 60 years…


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning