WASHINGTON (MaceNews) – It’s inflation week, with the CPI and the PPI on Wednesday and Thursday, reigniting the now sterile speculation about whether price pressures are transitory, when it’s more important for the same question to be applied to a quite different economic statistic, Tuesday’s report on productivity.

Simply stated, productivity growth is what sustains prosperity, a long-term concept that will be crucially important long after the future of accelerating inflation is determined. It’s enough to know productivity is now experiencing an improvement but in the context of a long-term historic slowdown, subtracting trillions in output from the U.S. economy since 2005.

Accelerating Inflation, meanwhile, is a short-term phenomenon that one way or the other, will come to an end. As ISM’s manufacturing guru Tim Fiore told reporters last week, it appears prices have already peaked in his realm.

And yes, as Federal Reserve Gov. Christopher Waller said during the week, he worries businesses will keep using their improved pricing power, consumers will resign themselves to prices with outsized increases and that will make the rate of change of prices persistent.

Yet that’s not, he said, his base case nor is it the base case for the core FOMC voters who will decide whether to speed up tapering of the Fed’s asset purchases. And as Fed Chair Jay Powell has repeated, persistently rapid price increases are automatically transitory, because if inflation gets too aggressive, the Fed knows how to tamp it down and will.

It won’t take long to find out if the base case for fading supply disruptions and increased supply wins the day. And when the rate of change of prices subsides or the Fed is forced to quash it, the question might then be, so what? A temporary inflation spike is not what will determine America’s place in the world in the decades ahead.

What will, though, is the rate of growth of productivity, which the Bureau of Labor Statistics reports for the second quarter on Tuesday. The result is expected to be quite good, as was the first quarter’s increase of 4.5%.

That’s not an accidental transposition of the originally reported 5.4%. The BLS was forced to revise lower a lot of the data having discovered what it said were embarrassing “processing errors. So 5.4% became 4.5%, manufacturing’s +0.3% became -1.7% and then -2.4% and so on.

While the markets focus on unit labor costs as an inflation proxy, the long-term path of the overall productivity figures are what calibrates national wealth, the capacity to pay down debt and the futures of our children and grandchildren.

The growth rate from 1947-73 was as impressive as it gets, 2.8%. Then simple labor productivity slowed to 1.2% from 1973-79, 1.5% 1979-90 and then picked up again from 1990 to 2007. Since then, its slowed again, to an increase of 1.5% from 2007 to 2020.

In U.S. manufacturing, after stellar rates of growth, productivity collapsed after 2007.

So are a few quarters of productivity rebound what is transitory? Are the wage hikes that have spread in a pandemic-caused labor shortage temporary? Or is a productivity-starved, debt-encumbered America where wage stagnation resumes in a year or two mean the American post-World War II economic leadership in the world is what’s transitory?

A footnote about productivity. Just as Congress deprives the BLS from upgrading its JOLTs report on job openings so it could become usefully current, Congress also does the same for productivity measurement, not allowing the upgrade of its multi-factor productivity reports that provide a much fuller picture of what’s happening than Tuesday’s simple labor productivity.

While the House-Senate Joint Economic Committee occupies itself with new guardrails for cryptocurrency, it continues to ignore the bigger issues, developing ways for the BLS and the Bureau of Economic Analysis to gather high-frequency data and to focus on productivity measurement. Ethereum was up nearly 20% last week. In the big picture, exactly how important is that?

The effect of anemic productivity growth is so enormous, it’s hard to digest, sort of like the incremental increase in the nation’s debt level. As productivity growth subsided, the national debt increased to the current $28,401,463,000,000 – more than $28 trillion – a figure now kept $25 million a day below the newly imposed debt limit, its suspension having expired July 31.

In September, as the government’s fiscal year ends and a government shutdown is threatened, or in October or November, Congress will again be challenged to overcome its mostly polarized paralysis to save the U.S. credit rating and avoid a historic default of its obligations – by again raising the unnecessary statutory debt limit.

Now to the important part. While the debt has grown past $28 trillion the nation’s capacity to repay it has plummeted. Overall, the BLS says, the cumulative loss in output since 2005 has been horrendous, $10.9 trillion, “corresponding to a loss of $95,000 in output per worker.”

Think about that. Have you ever heard anyone explain what that means? As you might have noticed, it’s almost an economic truism, no one cares. More accurately, those who do care are faint voices in the wilderness. The country occupies itself instead with culture wars, conflict entrepreneurship and opportunism, and vaccine hesitancy while the economic foundation erodes.

Yet the effects of sputtering productivity growth permeate the lives of everyone, bubbling into the public consciousness only obliquely, in discussions of income inequality, for instance.

The minimum wage has been eaten away by about $5 in inflation adjusted dollars since it peaked half a century ago, instead of growing along with the productivity rate to where it would be otherwise, around $25 an hour.

 McDonald’s workers may get that in Denmark but not here. So decades of setbacks for wages, the necessity of two-spouse incomes, an increasing share of national income diverted from labor and the biggest boom times  ever for the highest incomes brings us to where we are today, the pandemic. For the time being it has constrained labor supply, making it more valuable.

Yet the larger story of wage stagnation is a story written and rewritten for decades, to no effect. Some of those rewrites blame President Reagan’s firing of air traffic controls as the turning point that began a long strangulation of the middle class. In reality there has been so much more going on in the economy than a vulnerability to one president’s attack on labor or one union’s challenge to the law against government staff strikes.

Labor shortages, with Friday’s jobs report showing 5.7 million workers fewer on the job than pre-pandemic and 8.7 million total unemployed has meant that strictly speaking productivity should be surging. So much GDP growth, with so many fewer workers. As the Federal Reserve looks at it, that’s justification enough for stronger wage growth.

The national figures sort of indicate that’s happening, but not clearly since wages would seem to go up for no other reason than lower income workers  make up a lot more of the jobless than higher income people, skewing the wage distribution and how fast wages seem to be increasing.

And while those lower income folks now being hired back for higher wages are presumably happier, their former coworkers who aren’t being hired back because ways have been found to do without them are presumably in worse shape than they would have been had the pandemic not happened.

And despite the strong GDP numbers now and expected, the entire country is still worse off, having lost all that growth that would have happened had there been no Covid-19. Having lost so much, we’re riding a wave of government largesse paid for with borrowed money, masking the huge setback we’ve suffered. We’re a long way from making up that pandemic loss even though GDP is back to where it was before the sweep of the virus.

Back in the 1980s, when fear of losing a job became palpable, employers did not have to be told it was an era of opportunity as union membership shriveled. They didn’t know then though that the relative wage freeze for lower incomes could be maintained for another three or four decades. Without the pandemic, it would have continued unabated. The wage squeeze, however, could return and most likely will return. Will employers be to blame? Instead the blame will rest on slow productivity growth.

The squeeze hasn’t been all labor-management. The U.S. standard of living in general is under pressure after a long period of anemic productivity growth. What’s seen through the lens of inequality, as the distance stretches between income levels, can also in large part be viewed as the consequence of a leveling worldwide of income and efficiency to the disadvantage of the United States. Increasing productivity is a race that’s always under way.

Skyrocketing debt levels promise more erosion to come unless the productivity growth rate can be permanently and substantially boosted. If that sounds like a promo for the administration’s infrastructure package and other efforts to increase efficiency, that comes with some big qualifications. Because in the real world much of the infrastructure package heading for passage will be spent on maintenance and replacement, not productivity enhancement. And the usual gap between purposeful investment and government pork means some large fraction of the total will be squandered.

A more fundamental way to boost productivity, the potential capacity of the American economy, is what Fed Chair Powell has repeatedly recommended, better education outside of the nation’s excellent but vastly overpriced university system.

The relationship between productivity growth and prosperity is ironclad and hugely consequential yet alwayspoorly explained by the U.S. educational system even at its advanced levels. So in general political leaders aren’t prepared to appreciate its importance. Their constituents haven’t learned to worry about it. As academic achievement lags in the U.S. relative to many other developed countries, it’s a situation that’s not going to improve without a lot of national effort.

Consequently any pressure from the general populace for attention to the relationship of productivity to prosperity is mostly absent. The political pressure, instead, is on how to redistribute tax revenues and expand tax expenditures – those treasured loopholes. In the current polarized political environment even some mild reinforcement of the IRS has become as controversial as mask mandates. The result? National debt grows faster than the economy’s long-term capacity to grow and productivity growth atrophies, a recipe for relentless decline.

Back to Tuesday’s measure of labor productivity. Some say the very concept is outmoded and its measurement, when machines are replacing labor, is an increasingly futile exercise.

Surprise, productivity growth is pretty high in parts of Europe and Asia. Yet overall decline is happening worldwide. Nevertheless, in the battle to hold on to prosperity, for all practical purposes, America is flying blind. Underfunding our basic economic radar means the U.S. has hardly a clue about how it is faring in the two big metrics that count, how well we could be doing compared to our potential, and how well we are doing compared to our peers.

We don’t know why computerization, digitalization, robotics and labor substitution over the past half century hasn’t bolstered U.S. productivity growth or whether our primitive measurement techniques are just missing it. We better find out.

Second quarter productivity is reported at 8:30a ET Tuesday. All the data points for the upcoming week are listed below:

UPCOMING ECONOMIC DATA AND FEDERAL RESERVE EVENTS

Monday, Aug 9 – 10a ET June JOLTS; May 9.21 mln)

Monday, Aug 9 – 10:10a ET Atl Fed’s Bostic speaks, Ft. Lauderdale streamer

Monday, Aug 9 – 1130a ET Richmond Fed’s Barkin speaks, in-person Roanoke

Tuesday, Aug 10 – 6a ET US NFIB small biz optimism index (June 102.5)

Tuesday, Aug 10 – 8:30a ET 2Q US prelim productivity  (1Q +5.4%, ULC 1.7%/Y/Y)

Tuesday, Aug 10 – 8:55a ET US Redbook weekly retail activity (prvs  +17.2 %)

Tuesday, Aug 10 – 10a – Atl Fed Business Inflation Expectations; (prvs 2.8%)

Tuesday, Aug 10 –  2:30p ET ChiFed’s Evans speaks to media

Wednesday, Aug 10 – 7a ET US MBA wkly mortgage apps (prvs %)

Wednesday, Aug 10 – 8:30a ET US July Consumer Price Index (June +0.9%)

Wednesday, Aug 10 -10:30a ET – Atl Fed’s Bostic speaks, Chautauqua Inst

Wednesday, Aug 10 -KC Fed’s George speaks, NABE

Wednesday, Aug 10 – 2p ET US July Treasury Monthly Budget (June -$174.2 bln)

Thursday, Aug 11 – OPEC monthly oil report

Thursday, Aug 11 – 8:30a ET July Producer Price Index (June +1.0%)

Thursday, Aug 11 – 8:30a ET Initial jobless claims (Prvs wk     K)

Friday, Aug 12 – 8:30a ET US July import prices (June +1.0%)

Friday, Aug 12 – 10a ET Aug UMich prelim consumer sentiment (June 81.2)

Friday, Aug 12 – Census Bureau provides states with redistricting info

Friday, Aug 12 – 1p ET Baker-Hughes oil rig count (prev US +3/491)

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Contact this writer: denny@macenews.com.

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