Productivity - the alpha and the omega

While newspapers and media tend to obsess about unemployment rate or national debt or inflation (all important), all these things are downstream of the most important issue of all - Productivity.  How effective is a nation at turning scarce resources into demanded goods and services.  There are two aspects of productivity.  Efficiency dealing with the optimization of minimum resources for the output intended and effectiveness dealing with whether what is being produced is what is desired (by type, nature or quality).  Are we doing the right things (effectiveness) and are we doing them well (efficiency.)  

Productivity is regrettably challenging to measure but measures do exist and they are always revealing.  As in this article from Japan’s Productivity Ranks Lowest Among G7 Nations for 50 Straight Years.  We are accustomed to thinking about Japan as an enormously sharp competitor.  As they are . . . in focused areas.  Specifically, they had a marvelous four decades from 1950 to 1990, even into the 1990s, when their manufacturing sector raised their standards, and through competition, raised our own.

But Japan's economic prowess has always been a bit of a mirage.  Their manufacturing sector has been a juggernaut (and manufacturing being the sector most easily traded in some respects), but their services sectors and agricultural sectors are notoriously protected and inefficient.  Particularly, but not solely, their retail sector.

Combined with a rapidly aging demographic since at least the mid-1990s, they have been in a precarious productivity position for a long time.  And it is likely to get more challenging.

Click to enlarge.

China is in a not dissimilar situation except they industrialized much later, indulged in even more mal-investment across more activities and worsened their demogrpahic decline through a number of public policies.  

The US has routinely been at the top of the G7 or OECD productivity leagues, and certainly at the top among large complex economies.  A key element in productivity measurement is how many hours are worked and part of the American productivity phenomenon is a marked willingness of Americans to work longer hours in a year than most their global competitors.  

But that is only part of it.  More secure property rights, more flexible labor markets, a continental market (in terms of regulatory conditions) are all elements of higher productivity.  

Further, American development has been reasonably balanced.  We have a strong agricultural sector, a strong manufacturing sector and a strong services sector.  We are global leaders in all three.  

The central issue is that everything flows from productivity because productivity generates the margins which allow personal and national risk taking, personal and national investments in strategies and policies, and the capacity to ride out exogenous shocks.  Productivity is the singular most important measure of the effectiveness of a country's institutions.  

We can still do better or worse at downstream public policies, but productivity is the foundation on which everything else is built.