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13 January 2018

Productivity (2)

Tag(s): Politics & Economics, Technology, Future
I first blogged about Productivity after the 2015 General Election. Here’s what I said:

 ‘ “Never try to teach a pig to sing. It wastes your time and annoys the pig.”  Groucho Marx

During the General Election campaign the debate about the economy was astoundingly ignorant. Most ill-informed politicians kept banging on about austerity when government spending has never been higher, the national debt has never been higher and the deficit is still one of the largest in the developed world. Meanwhile one of the most important factors in the economy, that of productivity was never mentioned. Most good economists and even policy makers in the Treasury and the Bank of England agree that low productivity is the core economic challenge facing the UK. Output per worker-hour remains 2% below the levels of 2008 before the financial crisis set in while in the rest of the G7 group of rich countries it is 5% higher. As The Economist put it recently: “the French could take Friday off and still produce more than Britons do in a week.”[i] Growth in productivity is the ultimate economic foundation of future growth in wages, living standards and output.
 
Most economists agree that the problem in Britain has been a lack of investment, and I agree with this. But I also think there are issues with levels of personal productivity. I dealt with that aspect in my book The 20 Ps of Marketing.’
 
I then went on to quote a sizeable chunk of the chapter on Productivity in my book. This dealt primarily with personal productivity and I continue to believe that is a major problem. I also think it’s getting worse because of the way in which the internet has taken over so much of people’s lives. The addiction to the mobile phone and to social media has an alarming effect on personal productivity, which, scaled up, retards corporate and national productivity. I heard a horrifying story that JP Morgan, with which I had a long association as a Non-Executive Director of one of its largest Investment Trusts, has banned the receipt of personal packages at its London offices. Employees had developed the habit of ordering their packages from Amazon and having them delivered to their place of work. This had two effects: first, it overwhelmed the reception areas of these offices and their internal postal systems, thus reducing productivity as this work had no economic value to the firm; second it was a significant contributor to the huge increase in traffic in the City. Imagine all those vans delivering tiny parcels of books or whatever to places of work rather than to homes.
 
Since the General Election of 2015 we have had another General Election in which again there was no serious discussion of the issue. Most of the discourse seemed to focus on how we could spend more money, even when we are not earning it as a nation. The best way to earn money and pay for all the stuff the taxpayer wants free is to improve the nation’s productivity, i.e. increase the economic output per worker hour. But that is just not happening. We also had two wretched Budgets in 2017 which did nothing to address the issue, or indeed very much at all.
 
After the second of those Budgets, one commentator wrote: “The 1956 Suez crisis was the moment Britain had to wake up to the fact it was no longer the force it once was. The 2017 Budget was its economic equivalent.”[ii] While the Chancellor Philip Hammond had scrimped around to bung some cash at the political hornets’ nests of the NHS and housing, the Office for Budget Responsibility (OBR) had given its estimate that the UK economy will grow by less than 2% in each of the next five years – the worst official forecast since 1983.

But underlying this is an even worse assessment. For the past hundred years, the UK’s productivity has grown at an average of 2% a year. Since the 2008 banking crisis, this trend has been broken. For a time the OBR predicted that it would recover. It no longer thinks that; rather productivity growth will be just 1.2% by 2022. While I am customarily sceptical of official forecasting this rings true and simply means Britain is substantially and permanently poorer.
 
If true it is difficult to exaggerate how much this matters. Producing more from each hour worked, by enhancing working practices and investing in technology, creates conditions in which wages and living standards can rise, and more tax can be collected to finance additional government spending.  While the trends are not necessarily even and smooth, over time things generally get better. And if productivity is moribund we can expect massive damage to the general consensus about the way the country is run. Politics is blown to pieces and the traditional political parties are in trouble. You might think we have already reached that point with the takeover of the Labour party by the Corbynistas and the deep divisions in the Tory party over Brexit, but you ain’t seen nothing yet.
 
Productivity growth is sluggish in much of the developed world, but particularly bad in Britain. Many blame a lack of investment in training and technology, and indeed this is not really surprising when cheap workers are readily available on Britain’s buoyant labour market.
 
But perhaps this is where the silver lining might lie. The measure of national productivity is based on an aggregation of the measure of each worker’s output, i.e. Gross Domestic Product divided by man hours worked. Thus by this measure we are told that France has a higher rate of productivity. But this is at least in part because their rate of employment is lower than Britain’s. The unemployed are by definition not part of the statistical record of productivity. So which problem would you rather have? A job where pay does not increase or no job? And if you have no job at least part of your lost wages will be offset by the taxpayer.
 
Furthermore, while we’re again playing the game of forecasting we might question some of the assumptions in the OBR’s model. I am willing to bet that it largely consists of extrapolating existing business and economic models. But I have never known a time of such disruption. Over the past few days the newspapers have been reporting the Christmas trading results announced by the major retailers. The analysis was dreadful. From the results of two or three retailers the media tried to tell us that the consumer was on strike. What has happened is that the consumer is rapidly switching his/her buying from instore to online. John Lewis reported excellent trading results with a huge increase in ‘click and collect’. My wife and I used this service for the first time when the vacuum cleaner packed up. We ordered one from John Lewis and collected it at a nearby branch of Waitrose the following day. While waiting for just a few minutes for the assistant to fetch it five more customers turned up to collect their purchase.
 
Still on the subject of forecasting here are some forecasts and other observations given by the CEO of Mercedes Benz in a recent interview[iii]:
 
·         Software will disrupt most traditional industries in the next 5-10 years.

·         Uber is just a software tool, they don’t own any cars, and are now the biggest taxi company in the world.

·         Airbnb is now the biggest hotel company in the world, although they don’t own any properties.

·         There will be 90% fewer lawyers in the future, only specialists will remain.

·         IBM Watson is 4 times more accurate than human nurses in diagnosing cancer.

·         Facebook now has pattern recognition software that can recognise faces better than humans.

·         By 2030, computers will become more intelligent than humans.

·         By 2020 the car industry will be completely disrupted by autonomous cars. You will not want to own a car anymore.

·         Therefore we can transform cities and turn carparks into people parks.

·         Cities will be less noisy because all new cars will run on electricity.

·         Electricity will be both cheap and clean (based on solar power.)

·         More solar energy is being installed than fossil.

·         With cheap electricity comes cheap and abundant water.

·         Medical devices will work with your smart phone to take your retina scan, your blood sample and you breathe into it. It then analyses 54 biomarkers that will identify nearly any disease, nearly for free. Goodbye much of the medical establishment.

·         The price of the cheapest 3D printer has fallen from $18,000 to $400 within 10 years and is 100 times faster. Everything from airliner spare parts to shoes is being 3D printed.

·         There will be a $100 agricultural robot. Third world farmers can then manage their farms rather than work all day in the fields.

·         The cheapest smart phones are already at $10 in Africa and Asia. By 2020, 70% of all humans will own a smart phone. That means everyone has the same access to world class education.
 
I very much doubt that the OBR model takes much account of the impact of these kinds of changes. On the one hand jobs will go, at all levels in the work place. On the other hand, vast new economic models will emerge, some of which will be supremely productive.


[i] Bargain Basement The Economist 15th March, 2015
[ii] Larry Elliot The Guardian November, 2017
[iii] naukarinews4u.in/2017/05/14/must-read-article-on-how-our-lives-will-change-dramatically-in-20-years-by-ceo-of-mercedes
 
 




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