Krugman and the Luddites

The Nobel Prize winning economist and former Enron consultant Paul Krugman recently produced another hack job that shows he’s not interested in getting to the heart of problems but more interested in promoting the class warfare straw man that Obama is hoping will win him a 2nd term.

Krugman’s article is based on a report from the Economic Policy Institute (EPI) that has a graph showing the divergence between productivity and hourly wages and Krugman includes this graph in his short commentary. 

“I see from some of the comments that there’s a widespread belief that the wage stagnation we’ve experienced under “modern capitalism” is some kind of illusion, that it would go away if we took benefits into account.”

Nope:

In conclusion, Krugman offers this braggadocios warning to those who dare question his authority on the subject:

“Meta: if you think I’ve overlooked some crushingly obvious point, you might be right — but the odds are that you aren’t. I do know my way around these numbers.”

The main thesis of the EPI report was that greedy business owners were keeping their companies’ profits and not giving it to the hard working hourly employees and you can see that this quote from their report (emphasis mine).

“The hourly compensation of a typical worker grew in tandem with productivity from 1948–1973. That can be seen in Figure A, which presents both the cumulative growth in productivity per hour worked of the total economy (inclusive of the private sector, government, and nonprofit sector) since 1948 and the cumulative growth in inflation-adjusted hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). After 1973, productivity grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant. This divergence of pay and productivity has meant that many workers were not benefitting from productivity growth—the economy could afford higher pay but it was not providing it.”

There are many problems with this conclusion and it should be evident to anyone who has followed business and manufacturing trends in the US over the past few decades but since Krugman is either ignorant of those trends or chooses to ignore them, let me explain this graph from the vantage point of someone who has been in the real world, and specifically manufacturing, for the past 20 years.  I addressed this topic in a previous post and I’ll reference many of those topics below so you might want to go read that that post here after you’ve read this one.

Manufacturing, Unions and the Knowledge Based Economy

Part of the explanation of this chart can be attributed to the fact that during the 1970’s, when the divergence in productivity and hourly wages started, the US manufacturing as a percent of GDP started its decline.

It was during this time that Mexico, China and India became advanced enough for companies to choose those locations for manufacturing and with the high labor/benefit rates that Unions demanded, it was an easy call for many US manufacturing companies to choose low cost labor sites to make their products.  This is not something that is ‘evil’ as most Leftists will claim but a simple outcome from a global Free Market which will lead to a natural progression to a Knowledge Based Economy in the US.  A portion of my previous post explains it below:

“I am a proponent of the Knowledge Based Economy and I’d rather have the US involved in the higher paying manufacturing jobs such as product development, engineering, purchasing, finance and management.  It makes smart business sense to let Mexico, China and India be involved in the labor intensive (and sometimes dangerous) work of manufacturing products that lend themselves to mass production.  I’m also a proponent of the Free Market and since the Information Age has shrunk the size of the world as it relates to supply chains, it makes better business sense to have the high tech, high paying jobs in the US and the low tech, low paying jobs in countries that need them and price their labor accordingly.”

The US has the highest corporate tax rate in the world so this doesn’t help with regard to the jobs situation in the US.  Our government is forcing companies to move labor to other countries to maximize profit and this also contributes to lower hourly rates of workers as there are fewer jobs for them to fill.

Paying People Not To Work

As I showed here, the Welfare spending as a percent of GDP has continued to rise but this metric increased dramatically starting in the 1970’s.

If we pay people to not work then there is no incentive for them to go find work and this causes employers to struggle to fill labor needs in the US.  This shortage labor causes companies to move more jobs outside the US or look for more ways to increase productivity that will allow them to produce their goods/services with fewer employees.  With less competition in the labor pool, this also allows companies to pay a lower rate for that labor and this is another example of how Liberal policies actually hurt the lower class instead of helping them. 

Automation and Six Sigma

During the late 1970’s there was an invention that revolutionized the manufacturing environment and it was called the Programmable Logic Controller (PLC).  PLC’s were industrial grade computers that could be programmed via ladder logic that mimicked the syntax used in legacy hard wired control systems and it was a language that was easily understood by both engineers and technicians.  This new invention accelerated automation in the manufacturing environment and allowed companies to automate processes that had previously required scores of highly skilled (and highly paid) human operators.  In the modern manufacturing facilities in the US, much of the work is done by automated machines which generates productivity improvements and increased profits due to lower labor costs but these increased profits are passed on to engineers/technicians (who design and maintain the machines) that are not included in the hourly work force.  Fewer hourly workers were required to produce the same amount of product so with the demand for manual labor decreasing, economics tells us that their labor rate would decrease or remain flat.

Another paradigm shift that occurred in the late 1970’s and 1980’s was the advent of Six Sigma which stressed continuous improvement, higher quality and leaner manufacturing processes that led to additional productivity improvements and reduced the demand for hourly production operators.

Conclusions

The divergence in productivity and hourly wages is not a result of greedy business owners but a result of the Free Market, the Knowledge Based Economy, Liberal policies, technology improvements and a multitude of efficiency improvement programs such as Six Sigma.

Economists like Krugman don’t understand this because they are too busy looking at Keynesian theory and hanging out with their academic buddies.  The real world has ignored their bloviating and instead focused on running a business, improving productivity and maximizing profit.  Like it or not, we live in a global Free Market and a Knowledge Based Economy that rewards those with higher education and the US needs to get with the program because, for the most part, labor intensive processes are a thing of the past and are not coming back to the US. 

In 19th century England there was a group of people called Luddites, who protested technological improvements of the day (specifically looms) that replaced their positions with lower skilled (and lower paid) workers.  They rioted and even destroyed the machines in hopes that they could retain the ‘good ole days’ but they failed in their attempt to halt the march of productivity improvements.  Leftists like Krugman and Obama would love to roll the clock back 30 years to a time when companies were inefficient, Unions demanded unrealistic wages and companies were reliant on manual labor to make their products but the Free Market has caused companies to make improvements that are to the benefit of not only the companies but the world.  It is time we call these Leftists what they really are – Luddites.

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