-->Greenspan's Productivity Bubble
October 28, 2002
Dr. Donald Perry is a developer of ecotourism facilities in the US and founder of the Rain Forest Aerial Tram of Costa Rica, the largest privately owned ecotourism facility in that country.
For years Alan Greenspan has used productivity growth to encourage us that all is well in the economic arena. But what is productivity? Is it really a miracle-drug cure for our economy?

One perspective on productivity involves a trip to the farm to look at chickens laying eggs. Basically, productivity in the coop increases when chickens lay more eggs per day. Early on farmers noted that hens could produce more eggs when confined to a cage instead of running around searching for food, being chased by cocks, or having to evade predators. Putting them in a small cage, feeding them to the maximum and clipping their bills so they couldn't peck neighbors resulted in further gains in productivity. To understand productivity as it relates to the economy substitute the word"chicken" with"worker."

But any good economist knows productivity tells us nothing about the health of the egg-selling business. Given all the negative news in the market, and lacking anything positive to say, we would expect for Wall Street economic gurus to tout productivity gains as a miraculous drug that will make American healthy. However, if egg prices fall as productivity increases business is treading water at best. Greenspan acknowledges that while American business may be producing more eggs, the bottom is dropping out from under the price of eggs and in fact, eggs are pretty much worthless. A lack of"pricing power" is a long-term trend that is unlikely to reverse soon if ever.

When egg prices are going lower, egg farm productivity can be increased further by sending the poor layers to Campbell's. The farm then has fewer chickens to feed, gets the highest average output per chicken and makes a little extra money in the process. In the economy people are being laid off everywhere. It is this productivity increase that Greenspan vigorously applauds. Unemployment makes him happy or so he implied at a congressional hearing. But human chickens aren't sent to Campbell's, they get unemployment and buy fewer goods. Since there are fewer buyers the glut of eggs becomes even greater.

Another complication is that while it is plain to see that putting chickens in sweat shops all over the planet produces huge numbers of eggs, who will buy these eggs? Obviously, the market must correct itself by"wringing out the excesses." Ultimately many egg producers are going to go out of business. So when you hear Greenspan touting productivity gains you should be thinking"Who will be going out of business next?" Hint: Asian chickens produce more eggs on less food.
Productivity has been growing since around the mid 1990's. In the early 1990's it was something of an economic embarrassment that the massive investment in technology had not produced a concomitant increase in productivity. That was soon corrected by the accounting practices of corporate CEO's CFO's and their top of the line accountants/auditors. Is it coincidental that fraudulent accounting practices of the last decade were paralleled by significant improvements in productivity? A recent Richebacher Letter (available via subscription from www.dailyreckoning.com) outlines a couple of explanations for productivity gains over the last several years.
1. Output is overstated due to hedonic indexing. According to Richebacher, businesses spent $93 billion in new computers in 2000, but when GDP was adjusted for"real" growth, the computer spending figure ballooned to $246 billion.
2. In 1998 computer software was no longer treated as an expense, but as an investment. Investments contribute to GDP. Expenses don't.
3. I add that throughout those years huge productivity gains were made by removing vast sums, including salaries (as stock options) off of the balance sheet and in several cases adding vast sums to the balance books. With hidden debt and salaries and inflated revenues productivity has been skyrocketing. This is productivity Fraud!!

The Richebacher Letter concludes this about productivity"...it is a statistical artifact that says nothing about effects and has nil relevance for spending decisions of consumers or business; and third, it is most important how it comes about. It makes economic sense when production rises faster than"hours worked," but it makes little or no sense when - as in recent years - hours worked fall faster than rising production."
So when Greenspan now warns that productivity increases can't go on forever, what in the world is he talking about?

While the Fed"is struggling to sort out productivity," Greenspan said,"something is going on (and) at a minimum it is confirming that shifts in the rates of growth in productivity in the period subsequent to 1994 is real."
Ask yourself this, how much confidence should we have in a Fed that"is struggling to sort out productivity?" It was just done here in a page and a half!! If fraud is removed from the productivity calculations I would wager that there have been no productivity increases during the last ten years, except at the expense of jobs. By their own admission the Feds don't have the slightest idea what productivity really means.

To understand what Greenspan said about productivity takes us straight back to the barn yard -- the manure pile. In a pompous ruffling of feathers, Greenspan and the Feds are crowing:"Whatever is falling on this pile is falling faster and faster!"
Many of us know what's falling on the pile. That it is falling faster and faster is cause for real economic concern. Too much hot air (methane) has been blown into the productivity bubble and it is about to explode.

The type of productivity gains Greenspan applauds are negative indicators about the future of the economy. Let's just hope the sky isn't falling.