Absolute returns

So much capital is misallocated these days, and that continues to drive down trend GDP growth – the term misallocated capital is used by economists to describe capital that is deployed without having any impact on productivity – it’s capital that is deployed unproductively

Niels Jensen of Absolute Return Partners wrote about The Productivity Conundrum and listed five reasons why productivity growth continues to be lacklustre despite all the benefits we reap every day from the digital revolution:

1. Ageing of society at large, as older workers are less productive than their younger peers

2. The rising cost of servicing the elderly in society

3. Excessive indebtedness in all economic sectors and the rising cost of servicing that debt

4. The rising cost of producing the energy we need to spin the wheels every day

5. The fact that the savings freed up by the digital revolution have not been re-invested in reskilling the workers affected to a higher level but have instead been pocketed by capital owners

Reasons 2-4 all have to do with the rising amount of capital being deployed unproductively – capital that could, and should, have been used to enhance productivity

Niels then reminds us of the most fundamental equation in economic theory:

∆GDP = ∆Workforce + ∆Productivity

And given ∆Workforce will turn negative in many developed countries in the years to come, robust productivity growth is pivotal to future economic growth

However, since WW2, the US economy has only enjoyed two long-lasting periods of productivity growth in excess of 2% per annum (the same is true for most of the rest of the developed world):

  • The first unfolded from the mid-1950s to the mid-1960s – Eisenhower had returned from the war in Europe and told Congress about a German phenomenon called autobahns, which allowed Hitler to move his army swiftly around – Congress subsequently decided to establish the interstate highway system – at about the same time, commercial aviation took off and the two new modes of transportation had a meaningful impact on labour productivity over the subsequent 10 years or so
  • The second wave occurred in the early years of the digital revolution – the internet had just been rolled out, and that had a similar impact on productivity

Now, as we are entering the second stage of the digital revolution (advanced robotics, AI, etc.), Niels believes a declining workforce will most likely lead to depressingly low GDP growth

He then cites a paper called Negative Productivity Agents by J.P. Morgan Asset and Wealth Management which deals exclusively with the main negative factors that are holding US GDP growth back viz:

1. A massive war machine

Some wars that the US military has been involved in have improved prosperity whereas others have not – either way, the US war machine is very expensive to run – it siphons capital away from productivity-enhancing investment opportunities like education and infrastructure

2. An inferior infrastructure

Governments all over the world are determined to electrify virtually all heating and transportation as the fight against global warming continues – however, electrification of everything will only work if you have a reliable electricity grid, and the US grid is near the bottom of the international league table for reliability – significant investment to upgrade the grid will therefore have to be sanctioned before the US economy can take full advantage

3. Behavioural quirks

J.P. Morgan says the number of Americans killed by firearms in the last 50 years, including suicides, is more than 1.5 million which equates to more than 30,000 gun-related deaths every year – and the trend for this number is upward – the US is quite simply in a league of its own when it comes to gun ownership and gun-related deaths – hence, it spends a vast amount of money dealing with gun violence, money that could be spent on educating youngsters instead

4. Out-of-control healthcare costs

Gun crime, obesity and other behavioural quirks combined with ageing of the populace at large continue to push US healthcare expenses through the roof

In fact, US public healthcare expenditures are not miles away from the cost of providing public healthcare in Western Europe – it is the US healthcare model, based on private care paid for by insurance companies, that is the culprit

5. A “dysfunctional” legal system

The last negative factor is the excessive level of corporate litigation costs in the US when compared to other OECD countries

Excessive litigation costs siphon capital away from potential productivity-enhancing corporate investments which could benefit all – instead, the money is spent on protecting corporates from ridiculous lawsuits

Productivity versus regulation

Niels quotes Dietmar Meyersiek for concluding that superior economic growth was very much affiliated with greater economic freedom i.e. productivity could be dramatically affected by the extent of regulation

Meyersiek had based his conclusions on work conducted by the Heritage Foundation which defined economic freedom as business, trade and investment freedom, financial and fiscal freedom, size of government, monetary freedom, property rights, freedom from corruption and labour market flexibility


Clearly, despite the above negative factors, the US is still a very free economy so it’s no surprise to see them topping this chart

The chart also suggests there are probably even more negative factors in Europe than in the US

Niels raises just one, for example – in 2009, the EU Parliament passed a new law regulating the shape of bananas – such laws are not just silly, they offer nothing in terms of consumer protection – they also add to the costs of the corporate sector – hence, they impact productivity negatively

Even worse, Niels concludes, they turn many people against the EU

A toast to bananas

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