Productivity vs. Wage Levels & Manufacturing Jobs

A week or more ago, CNBC featured one of their occasional guests, Dr. John Rutledge. Rutledge is a man of impressive credentials as an economist, academic, and businessman.

Amidst a debate with other economists, Rutledge reminded everyone of reminder of an old conundrum. To wit, wage growth moderation translates into productivity, which fosters economic growth. Thus, if you measure an economy via value growth, and productivity, not the level or growth of one input's incomes, i.e., wages paid to labor, then you put inputs in their proper perspective.

However, if your first, and primary measure of economic health is simply wage levels and growth, you will probably miss the big picture of productivity growth and overall healthy economic growth.

This echos discussions I had years ago with a then-partner about consumer benefits of productivity vs. their effects on incomes. Lower wage growth, via higher productivity, means less-expensive goods and services, and, thus, effectively higher productivity-adjusted incomes.

Then there is the question of compensation packages. The old method of measuring bi-weekly paychecks to estimate national incomes is surely outdated. How does a Wall Street bonus get counted? Or equity participation by workers in the profits of the firm?

Lastly, there's the question of type of business to which an economy allocates its resources. Do we really want our economy putting hefty resource allocations into rather plain, undifferentiated jobs which are low-skill assembly-line or metal-bashing?

Yesterday's exchange, on this point, between Fed Chairman Ben Bernanke and Vermont Socialist Senator Bernie Sanders was priceless. Sanders tried his best to maneuver Bernanke into agreeing that we need to preserve old-line, low-paying manufacturing jobs, at the expense of a growing, productive economy. Ben didn't bite, and, instead, tossed Sanders a couple of curve balls.

First, he directly contradicted Sanders, and stated that, on balance, despite some marginal job losses, the overall economy benefits from free trade. Second, he asserted that our trade deficit is caused, not by our trade policies, but by our savings and investment policies. That is, we attract capital by not providing sufficient resources ourselves, thus, creating a deficit, not by just buying too much as imports.

For a discussion of why this is not, however, all bad, see my post here, from January 1st, on the recent WSJ article by Edward Prescott.

What was troubling, however, was Bernanke's agreement with other Senators, that our overall deficit, which has actually been shrinking, and our 'savings rate,' are worrisome.

These are important points, because flawed governmental tampering with our macroeconomic framework could derail the productive, profitable use of our capital to drive economic growth with low inflation. If the economic framework becomes distorted, it will be all the more difficult for our publicly-held, private enterprises to create the value our society needs, as capital, to continue investing, creating innovation, and providing for retirement assets for the aging members of our society.

Paradoxically, as Prescott points out, we need more debt and capital, if necessary, from abroad, not less, to feed the unique, premier value-creation engine that is our US capitalistic economy.