Re: Batra's September book

On Mon, 18 Oct 1999 20:04:03 -0400 "Kirt Olson (CITS)"
<kolson@HELIOS.ACOMP.USF.EDU> writes:
>
[in response to Mr. Priest's description of Batra's new book]
>
>If the productivity were used to reduce prices, I would think no wage
>increase would be necessary to avoid encouraging debt.

I believe this would be so.  Batra attributes the lack of price
reduction to "regional monopolies" that have dominated the U.S.
economy resulting from mergers, and also the massive advertising
campaigns that steer most buyers towards goods of non-reduced prices
and, in many cases, price increases.

>
>Is the point that productivity increases have to return to workers in
>the specific industries or that it it must return to society at large?

Batra has a "simple illustration" in his book which I reproduce below.
Based on the illustration, I don't see that it is necessary for the
productivity gain returns need to be industry specific.

>
>Why does it matter if the increased profits go to many persons or only
>a few? How do the few prevent society from gaining?

This is the heart of Batra's illustration below.

>
>There's a related question of what managers do to hold productivity
>down. Essentially we invent things that are ten times as productive
>but get 2% increases in practice when the stuff hits the street. Does
>Batra address this in any way?

I haven't finished the book, but I don't think Batra addresses this.

Could you illustrate what, exactly, you have in mind when you talk
about 10 times versus 2%.

>
>--Kirt

Regards,

Curtiss Priest

Source: Ravi Batra, "The Crash of the Millenium,"  New York: Random
House/Harmony Books, 1999, pp. 66-69

Provided under Section 107 of the 1976 U.S. Copyright Act under "fair
use" for comment and criticism.

                  ***Advertisement***
Batra's book is available at local Barnes & Noble book stores

WAGES AND PRODUCTIVITY

Supply and demand for goods are linked to the workforce through wages
and productivity. What happens in the national labor market is the key
to a country's economic health. Supply and demand for workers
determine wages and employment. Skilled and motivated workers are the
backbone of high efficiency, but what is perhaps crucial is that
company wages reflect labor productivity. When new technology raises
hourly output, then fairness demands that workers are properly
compensated for their hard work and skills. This is not only a
question of ethics but of labor peace and social prosperity as well.

Wages are the main source of demand, productivity the main source of
supply, and if the two are not in sync with each other, then national
supply and demand cannot be in balance for long, and eventually the
economy runs into major trouble. For a while the balance between the
two forces can be maintained by raising artificial demand through
excessive business investment, or through the expansion of consumer
debt, money supply, corporate debt, government budget deficits, and
even exports, but these are mere palliatives that may mask the problem
for some time. Artificial spending is the stuff of which economic
disasters are made. Frequently it culminates in recessions, but
occasionally it has even spawned depressions and inflation--even
hyperinflation. Whenever and wherever a country has suffered a major
depression, you will find a persistent and substantial
wage-productivity gap. The bigger the size of artificial demand, the
greater the eventual trouble.

A SIMPLE ILLUSTRATION

When the labor market is distorted in the sense that real wages lag
behind productivity, the entire economy behaves irrationally. Let us
take a simple example in a very simple economy. Suppose there are one
hundred workers in a society, and each produces $5 worth of output.
Worker productivity is then $5, and if everybody is employed, total
output or supply will be $500. U.S. experience of the 1950s and the
1960s reveals that a high-growth economy with practically no
unemployment and inflation requires that about 80 percent of output go
to labor and the remaining 20 percent to the owners of
income-producing property or capital, which is also an important
resource contributing to productivity. (Capital owners usually earn
incomes through their labor as well, so the 20 percent share is not
their only source of earnings). Under this rule, wages will be 80 per-
cent of output, or $400, and profits the rest, or $100.'4

Keeping the argument as simple as possible, let us suppose that
initially all wages are consumed and all profits are invested into new

technology and the replacement of worn-out capital so that consumption
spending is $400, investment spending is $100, and the

aggregate spending is $500. In this case, the economy functions
smoothly, for both national supply and demand for goods equal $500.

Now assume that owing to new technology, worker productivity doubles
to $10, so the value of output generated by one hundred

workers rises to $1,000. If wages and consumption also double to $800
and the profits and investment to $200, again national supply and
demand for products will remain in balance, this time each equal to
$1,000. However, suppose wages rise only to $600, while profits up to
$400. Consumption now equals $600, and it is clear that investment
spending must now be $400 lest national demand be short of supply,
resulting in overproduction. Would businesses be willing to put all
their profits into new investment, when consumer spending grows
slowly? The answer is most likely not.

If you are investing $200 when your sales are $800, you are not

likely to increase your investment for business expansion when your
sales go down to $600. If companies realize that the current demand
for their goods is inadequate, they will trim their investment even
below $200. The purpose of capital spending, after all, is mainly to
meet consumer demand; you would expand your business only in
proportion to your sales. If sales fail to materialize, investment
will decline. With consumer demand less than $800, the companies will
invest even less than $200, in which case total spending will fall way
short of supply, businesses will be stuck with unsold goods, and
layoffs will have to follow. Thus the simple example makes it clear
that when wages lag behind productivity, distorting the labor market,
the product markets will also be out of kilter.

It is of course possible that, for a while, the companies may not be
aware of the shortfall in consumer demand; their high profits may
convince them to expand their capital expenditures all the way up to
$400 and to buy more machines. In this case, demand and supply will
each equal $1,000, and the economy will reveal no signs of the
potential imbalance possible from the slowdown in consumer spending.
The growth process, however, will continue. With investment
skyrocketing to $400, the use of new technology and worker
productivity will climb even faster.

Suppose in the next round output per employee jumps to $20, so total
supply, with full employment of labor, soars to $2,000; if wages and
consumer demand rise only to $1,200, then investment must climb to
$800 to maintain the balance between supply and demand. It is clear
that with wages lagging behind productivity, the growth process will
become explosive, requiring ever-increasing doses of business
investment to maintain high employment and the living standard.

This process is purely artificial in the sense that businesses will be
selling a large portion of their goods to each other rather than to
consumers to sustain their prosperity. It's like a Ponzi scheme in
which you have to create sellers to buy your products and sell them to
other sellers. Such schemes always collapse. When firms raise their
capital spending and buy more machines from other companies, in
reality they sell goods to each other, because consumers certainly
have no use for plant and equipment. Sooner or later, a point will
come when the companies are unable to sell all their output, and a
recession or a depression will result. If the growth process continues
for a long time, then the potential overproduction becomes so large
that a depression becomes inevitable.

It is noteworthy that the power of this logic in no way depends on the
simplicity of our assumptions. In the real world, some workers do
save, and not all profits may be invested. Furthermore, there is a
large government sector today in most economies, which additionally
have to reckon with the ills of inflation. Labor income also may not
initially amount to 80 percent of output; these assumptions are not
crucial to the argument. What is critical is that real wages grow
slower than the rate of productivity resulting from new technology and
business investment.

What could be done to rectify the problem? Since the fundamental
source of the imbalance in both the labor and product markets is that
wages trail productivity, the solution is clear. Either a law should
be passed that all output be divided proportionately between labor and
capital, or some institutions should be created such that wages grow
in sync with hourly output. This, of course, has not been done
anywhere in the world, even though the wage-productivity gap,
hereafter called the wage gap, has been soaring all over the globe for
the last three decades. Then how has the balance been maintained
between demand and supply for products?

The two forces of the market must always be in balance; otherwise, the
global economic systems will explode in a storm of instability, which
has not happened in the United States at least since 1990 and in Asia
from 1990 to 1997. Some may even dismiss the global recession of 1990
and suggest that the world escaped a major slump between 1983 and
1997. The wage gap inevitably results in demand gap, which equals the
difference between national spending and the economy's maximum
potential output. Stated another way, how has the world, especially
the United States, succeeded in eliminating or reducing the demand gap
in the wake of a large wage gap persisting for decades?

Almost all nations have followed the same recipe to maintain the
market balance. Although a variety of artificial means is available to
raise demand to the level of supply, most countries have resorted to
high consumer and government debt. Investment spending, as shown
above, can also be augmented to plug the demand shortfall, but this
measure may generate more problems than it solves. For business
investment initially increases national spending, but later stimulates
productivity. As we've seen, to plug the demand gap, the country will
have to allocate ever increasing sums for capital formation, and the
problem will only grow over time. There is one nation that has tried
this method--Japan.

In most regions, now including Japan, government deficits and debts
have skyrocketed. Is it a coincidence that this phenomenon coexisted
with the soaring wage gap?  Clearly not.  In fact, the logic of the
argument is that this was inevitable: governments around the globe
were forced to do this to maintain superficially healthy economies. 
Unable and unwilling to eliminate the wage gap, this is all they could
do in the name of sound economic policy.



           W. Curtiss Priest, Director, CITS
      Center for Information, Technology & Society
         466 Pleasant St., Melrose, MA  02176
         Voice: 781-662-4044  BMSLIB@MIT.EDU
 Fax: 781-662-6882 WWW: http://www.eff.org/pub/Groups/CITS