When the 21st century began, Google was a little utilized search engine reliant on word-of-mouth, not to mention that the engine itself was used in concert with internet connectivity that was still of the dial-up variety for many. And for those with faster connections, they weren’t very fast. To say that internet access in 2000 was a fraction of today’s is a statement of the obvious. Thinking about all this, along with the explosion of smartphones and services like Uber since then, can it really be said that productivity growth has stagnated? Without concluding one way of the other, the Wall Street Journal’s James Freeman points out that the numbers signal sluggishness.
So while Freeman might agree that the Labor Department is the wrong entity to try and divine worker efficiency, his assertion that “the Trump economy still looks disturbingly similar to the Obama economy” rates discussion. Indeed, while broad economic optimism certainly feels like it exceeds what prevailed several years ago, or even a year ago, few would associate the optimism of today with the good feelings that characterized the Reagan ‘80s and Clinton ‘90s. Freeman’s onto something, and the question is why.
Freeman expresses surprise at the low productivity growth despite President Trump having “taken a machete to the corporate income tax and federal regulations.” He makes a fair point, but seemingly lost in all the excitement about the corporate tax cuts is that they weren’t that large. Lest we forget, before the 2018 changes corporate tax collections were already very small. Thankfully so. Given the globalized nature of U.S. companies, they were already able to shield a great deal of what they took in from the grasping hands of the federal government. This was a good thing. As taxpaying entities, corporations are a fiction. Individuals own corporations, so they're better off when corporations are taxed less.
More evidence supporting the basic truth that corporate taxes were never that high before 2018 is rooted in the happy reality that U.S. companies dominate any list of the world’s most valuable. This was true before the tax cuts, and after. But would it have been true before if the effective corporate tax rate had been anywhere near 35%? Not very likely. Corporations are valued based on projections of future earnings, and the latter are often informed by present-day earnings. So unless rather high U.S. corporate valuations were all an effect of conjecture as opposed to reality, U.S. companies have long been able to shield substantial earnings from the tax man. Amen to that, but it also speaks to how oversold was the reduction in the corporate tax rate from 35 to 21 percent. It should be added that the lower repatriation tax rate that was part of the tax bill was in fact a tax grab of billions of dollars that were already likely here given the certainty that foreign earnings weren't stuffed under mattresses. The latter is something cheerleaders of the allegedly pro-growth tax cut would rather not discuss.
As for individual rates, the greatest pockets of wealth remain coastal. More specifically, despite high rates of taxation in New York and California, the economically talented continue to cluster in each state. That they do signals that the individual rate cuts were similarly oversold by the GOP. We know the talented in high tax states will face higher tax rates in the coming years.
On the regulatory front, it’s apparent that Trump has delivered. At FreedomWorks, the regulatory statistics work out to 20+ regulations repealed for every new one. Who knew, but Trump appears to be a ferocious deregulator.
Trade? This will be interesting. And could be terrifying. The genius of open borders to goods and services is that the people in the most open country always and everywhere win. They do because they have the whole world competing to serve their needs. By extension, every day the world gets up to go to work, the open country gets a raise. More important, however, are the productivity implications of a country that keeps tariffs low to non-existent, and without regard to what other countries do. That’s the case because the division-of-labor that deliberately opaque economists talk about is just another term for individuals around the world doing the work that most amplifies their skills. When we divide up work with the world’s inhabitants, along with the world’s robots, we can specialize. And when we can specialize, we’re much more productive.
All of the above matters in consideration of President Trump’s expressed desire to level tariff rates with other countries. There’s no need. Americans already have the best deal of all since our tariffs (an average of 1.4% on foreign goods) are among the lowest in the world.
Which brings us to the dollar. Freeman notes that productivity “took a nosedive during the 1970s before coincidentally bottoming out right around the time that Americans were exchanging President Carter for President Reagan. A productivity revival ensued, with roughly a quarter century of increasingly good news before the slump of the past decade.” Crucial about the timeframe Freeman mentions is that the dollar plummeted during the Nixon/Carter 1970s, and then recovered under Presidents Reagan and Clinton in the ‘80s and ‘90s. While gold was trading at $35/ounce in 1971, it rose all the way to $875 in January of 1980. By 2000, gold had fallen all the way into the $250-$300 range.
Freedman also reports that productivity plummeted during the George W. Bush and Barack Obama years. Crucial there is that while gold was once again trading in the $250-$300 range when Bush entered the White House, it was near $1000/ounce when he departed. When Obama departed in January of 2017, the dollar price of gold, after hitting an all-time high of $1,900 in August of 2011, was in the $1,250/ounce range. The weak dollar looms large in any discussion of productivity.
Figure that productivity is merely an increase in output per man hour. The latter is achieved through investment, and when investors invest they’re buying future dollar income streams. In that case is it any surprise that productivity rates, though perhaps under-measured by Labor, are still a faint shadow of what prevailed in the ‘80s and ‘90s? Not really. Economic growth is an effect of investment, which means economic growth is an effect of productivity. A falling dollar exists as a huge tax on investment simply because any returns, if achieved, are blunted by the dollar’s decline.
Looking at the periods of slumping productivity growth since the early 1970s, what Freeman describes neatly coincides with a slumping dollar. Well, of course. “Productivity slump” is just another term for “investment slump.” Investment slumps most likely to reveal themselves when weak dollar policies render investment quite a bit more expensive.
Considered in light of future policy from Republicans, since 2000 they've tried tax cuts, faux Keynesian stimulus, bailouts, tariffs, dollar devaluation, and even de-regulation. None have brought back the excitement of the Reagan and Clinton ‘80s and ‘90s. The one thing we’ve never tried since Bush entered the White House are the strong dollar policies that were mostly the norm under Clinton and Reagan. As it stands now the dollar price of gold is five times what it was when Bush entered office. Is it any surprise that productivity has sagged in concert with such a substantial devaluation?
The dollar cries for our attention. The political party that wakes up to this productivity-sapping elephant in the room stands to gain. Big time.