http://www.cato-unbound.org/2006/02/06/theodore-dalrymple/is-old-europe-doomed/

I see no contradiction between Roach and Business Week at all. Roach writes about seemingly impossible rates of productivity increases in the labor sector (I assume during the early 2000s). Business Week also touches on this in passing.

I worked at Nortel Networks, which was a fairly typical case in the telecoms/software sector during the telecoms crash of 2001-2004. Nortel, a formerly very large and stable company, saw a catastrophic crash in earnings and cut between 60 and 70% of permanent staff (not counting contractors, where the bloodbath must have been worse if anything).

What did they cut? Across the board, but proportionately I'm certain the cuts to R&D approached 100%. They were butchering their future but unless they cut costs to meet revenue they weren't going to have a future! Cuts to currrent operations were probably small by comparison.

What was the impact on Nortel's labor productivity? Measured against their then current product line I would not be surprised if they had a huge rise in measured productivity. I would not be surprised at any figure below a 25% rise, but really it could be almost anything.

The entire idea of trying to measure labor productivity in an organization dismantling itself as quickly as possible seems faintly comical. I have this picture of a little man in a green eyeshade interviewing a manager: 'And what effect have the recent changes had upon labor productivity, Mr. Jones? (slightly wild laughter from Mr. Jones, the sounds of a door opening and a brief struggle). 'Mr. Jones? Mr. Jones?!!' Automated operator comes on. 'The party at this extension is no longer available. To leave a message press the # key.....'

Count me a skeptic about any brave new world - just as Stephen Roach is. The value of the Biz Week piece is that it goes some way to explaining a pair of mysteries: How the 2001-2004 bloodbath in technology did not show up in GDP statistics in any pronounced fashion and enormous US trade deficits persisting over decades.

The leisure argument is an interesting one. I think it might be possible to explain increased leisure in part based upon the business cycle.

It seems to me that leisure may decline as the business cycle reaches a peak and pressures for overtime (paid and unpaid) increase. Leisure may decline further after the peak in the cycle as companies cut staff and try to stretch the remaining staff to cover the workload. But leisure may recover in the early and middle stages of the recovery as companies hire more staff and existing staff try to recover from previous stresses. We're in the middle stages of the recovery, so leisure time may well have increased. This doesn't necessarily point to any permanent improvement in leisure however.

I think we're largely at sea here. I don't believe or disbelieve any of the arguments advanced by the pieces Daniel linked to about productivity, investment, or leisure. I think we don't know and our measures are too feeble now to give definitive or even indicative answers. We may have enormous trade deficits - or small ones, or a trade surplus.

I see no contradiction between Roach and Business Week at all. Roach writes about seemingly impossible rates of productivity increases in the labor sector (I assume during the early 2000s). Business Week also touches on this in passing.

I worked at Nortel Networks, which was a fairly typical case in the telecoms/software sector during the telecoms crash of 2001-2004. Nortel, a formerly very large and stable company, saw a catastrophic crash in earnings and cut between 60 and 70% of permanent staff (not counting contractors, where the bloodbath must have been worse if anything).

What did they cut? Across the board, but proportionately I'm certain the cuts to R&D approached 100%. They were butchering their future but unless they cut costs to meet revenue they weren't going to have a future! Cuts to currrent operations were probably small by comparison.

What was the impact on Nortel's labor productivity? Measured against their then current product line I would not be surprised if they had a huge rise in measured productivity. I would not be surprised at any figure below a 25% rise, but really it could be almost anything.

The entire idea of trying to measure labor productivity in an organization dismantling itself as quickly as possible seems faintly comical. I have this picture of a little man in a green eyeshade interviewing a manager: 'And what effect have the recent changes had upon labor productivity, Mr. Jones? (slightly wild laughter from Mr. Jones, the sounds of a door opening and a brief struggle). 'Mr. Jones? Mr. Jones?!!' Automated operator comes on. 'The party at this extension is no longer available. To leave a message press the # key.....'

Count me a skeptic about any brave new world - just as Stephen Roach is. The value of the Biz Week piece is that it goes some way to explaining a pair of mysteries: How the 2001-2004 bloodbath in technology did not show up in GDP statistics in any pronounced fashion and enormous US trade deficits persisting over decades.

The leisure argument is an interesting one. I think it might be possible to explain increased leisure in part based upon the business cycle.

It seems to me that leisure may decline as the business cycle reaches a peak and pressures for overtime (paid and unpaid) increase. Leisure may decline further after the peak in the cycle as companies cut staff and try to stretch the remaining staff to cover the workload. But leisure may recover in the early and middle stages of the recovery as companies hire more staff and existing staff try to recover from previous stresses. We're in the middle stages of the recovery, so leisure time may well have increased. This doesn't necessarily point to any permanent improvement in leisure however.

I think we're largely at sea here. I don't believe or disbelieve any of the arguments advanced by the pieces Daniel linked to about productivity, investment, or leisure. I think we don't know and our measures are too feeble now to give definitive or even indicative answers. We may have enormous trade deficits - or small ones, or a trade surplus.

Seems perfectly consisent with an economy where productivity is improving somewhat (with caveats as noted by Mr. Stadler), prices of basic luxury goods are declining (the fabled "big screen TV"), wealth is concentrating heavily in the top 2.5%, and job security is falling/fear is increasing in the bottom 50%. Hits all the datapoints described.

Cranky

Here in the rustbelt, our economies are still deteriorating.

Since Bush cannot run for reelection he could care less (he cared alot during October 2004).

Only a massive beating in the 2006 elections will cause any political changes before 2009.

"Trade makes us prosperous!" Gag.

It helps to remember that economics is not a "science." Once you recall the wild disparity of opinions about matters chemical in the days of phlogiston, etc., economics makes more sense.

May I throw out a question?

Can either Dan or his readers tell me of one person they know who uses the words "doomsayer" or "naysayer" in normal conversation?

I don't know any such person. I have never met any such person. These are among a group of words and phrases used only in the stylelized dialect in which public affairs are discussed in this country. This dialect, so removed from the everyday English used by Americans, has played its part in the alienation of large parts of the public from their government and the political world generally.

I don't really expect many people will disagree with this, but instead that most will heartily concur.

"naysayer" is used in the corporate world to beat down anyone who raises a legitimate concern about a project/decision already approved at the Asst VP level or above. E.g forming "Chewbacca Partnerships".

Cranky

save_the_rustbelt ...

Where, exactly, are you located? Here
near Downtown Chicago, a huge building
boom is taking place.

The same out in the western and northern
suburbs of Chicago.

And the corridor between Chicago and
Door County in Wisconsin exhibits similar
- admittedly anecdotal - signs of growth.

Based on an inability to find parking
spaces during the weekends, the major
shopping Malls are jam packed. I'd
guess at least one third of the retailers
have "help wanted" signs out.

So I'm interested in what part of
the rust belt is showing declining
economic activity.

> So I'm interested in what part of
> the rust belt is showing declining
> economic activity.

Well, first you have to define what you mean by "declining economic activity". It is not at all clear to me that our current levitating-on-air economy of mall shopping and tract house building can contine to operate much longer with very little internal manufacturing and with the need for fresh injections of Chinese savings every quarter.

However, to your question: the part of the Rustbelt that runs from Cleveland diagonally across Indiana to St. Louis and across to Kansas City, with a short hook up to Dee-troy-it, ain't doing so well overall. Some big winners, yes. Some properous areas, yes. Miles and miles of abandoned factories - abandoned since 1990 - that too.

Cranky

Cranky, when I traveled to the Cotswolds (UK) recently I saw the ruins of major industrial towns, with many rows of abandoned factories.

You can see many abandoned factories in London as well. Of course nobody thinks of them that way because they have been redeveloped into upscale housing, apartments, and shops. But that is what they were and have been for many years.

My hometown of Milwaukee suffered from lots of closed factories as well. Some remain closed and derelict, but mostly the factory areas are being redeveloped into some of the most vibrant parts of the city. From what I read even the likes of Cleveland and Detroit are experiencing similar revivals.

But we still get to 'fine-tune' the economy, right?

Most of what I have ever needed to know about macroeconomics came in a single flash of insight when I realized my macro professors in the early 1970's had no clue what they talking about.

I think there is a lot of confusion between how US companies are doing and how the US is doing. Most large US companies are heavily international and are doing well. For them, the US is increasingly just a large consumer market. That is a far cry from how the US is doing.

Most large European companies are heavily international and - doing not quite as well.

Do you think there is a link?

The situation in a nutshell: there's an arbitrage where US multi-nationals are selling into western consumer markets in which consumer wages are falling and consumers are being squeezed, but they're making a killing because that squeeze is more than offset by the low wages they're paying due to globalization. In essence they're making money off the spread in wage rates.

This game can't go on, for the simple reason that's it's based on the willingness of the US consumer to pile up debt.

Also this situation creates a confusing picture for business investment, which is why it has been consistently weaker than expected. That weakness reflects business uncertainty about the American economy. In fact, investment in the US (other than slashing jobs, which as a poster discussed above, can result in soaring productivity) has been weak. Capital investment is taking place outside the developed world.

In essence, the high paid workers in the developed world have been the goose that laid the golden egg, and now it is time to kill the goose.

The execs don't care because profits are good, they've soared in fact, due to this arbitrage.

Ted,

Try Hammond, Gary, and East Chicago Indiana. Still look like a bomb hit them. These are places where mills and rust belt plants are located. Up there where you are, thats where the owners are. Take it from me, I grew up in Northwest Indiana. During the late 70s, we lost 50,000 jobs, in an area with about 500,000 people. Those citys I mentioned, once rich cityies, are now gettos.

When is the last time you saw someone limp? Really, someone who walks with a limp? Go to one of these cities and just park downtown. You'll see it.

Sorry about that aside, but its pretty bad there.

Anyway, I agree with lots of the revaluation of these datas that were suggested in your post. Roach is a long time 'doomsayer', but he makes some really good points with productivity, we should be very concerned. That said, I've long thought that its hard to measure the gains made from increased technology usage.

We need to be careful with these definitions. Thats the part of the point that roach was making in his article back then. Its very possible that the US is making all of these investments that are not counted in the data, and they probably should be included. That said, has it really been that great of an economy? I think most people, when compared to 1998, would say, "No."

I hate to bring this up, but when you look at the workforce numbers, its not that strong of a recovery. Less people consider themselves to be in the workforce than 5-6 years ago. This combined with anectodatal data (20,000 apply for jobs at a new walmart) makes me think there are about 5-6 million people out there who want to work, but are not currently working.

I think we might be seeing the beginning of the next boom times, though. Its been about 5 years since the bubble burst, and usually, it takes about 5 years for things to really turn around. What many people have been claiming has been the recovery has probably been just a long, very shallow recession.

I did a little excel sheet on median incomes. We're down about 4% from the peak in 1999, don't have the 2005 data yet, so this is through 2004. I don't think incomes grew 4% in 2005, so its been 6 years since we've made a high. 90-95 and 73-84 (!) were other recent periods where wages were stagnant and/or fell.

I don't think we're in an extended period of wage stagnation like the 70's right now, because I think our economy was making a large and extended change through that period , from manufacturing based to information based. We're still in the middle of it, but that was the beginning.

I'm not sure we're discussing the relative strength of recoveries as much as enduring problems with our national economic statistics, mickslam.

That may sound awfully dry but it actually has some enormous implications not only for the US but potentially internationally. I personally was caught in the middle of the tech disaster of 2001 to 2004 and in the worst year US GDP grew by 0.4 percent. This while Fortune 500 companies were dropping like flies (Worldcom, Global Crossing, Enron, etc) and many more very large companies came within a hair of bankruptcy or shrunk radically. A partial list of these includes AT&T, Lucent, Nortel, and Sprint. all of the mobile phone operators were hit hard. Many large software companies were hit very hard. AT&T sold to SBC late last year for $16 billion. AT&T's market value in 1998 was probably more than $250 billion! It was not unusual to see tech companies with a 99% drop in their share price, and a tech company which *only* dropped 90% of it's market value was downright lucky or well-managed!

Through all that official US GDP actually grew 0.4%. In the worst year. It's a big mystery, no? The reason it's important is that the whole sector was suffering horribly - millions of people directly and indirectly were hit - but it was basically invisible to policymakers because the official statistics said there was no recession at all! Unlike the early 80's when Reagan took action to lift the immediate pressure off the auto industry nothing was done at all because it was an 'invisble' disaster.

What did they miss? These intangible investments the BW piece talks about - perhaps.

This has little to do with specific US administrations - it was invisible under Reagan, Bush I, Clinton, and Bush II. It's not even specific to the US. You think EU-based and Japanese companies aren't investing in intangibles also? Of course they are.

To Don Stadler's point, it's not at all clear that our conventional measures of productivity have much relevance to the way corporate managers allocate capital and organize work. For example, it's assumed that tech investment-- which is usually focused on extraordinarily expensive third-party software applications, also hardware-- causes productivity to rise. Yet anyone familiar with the internal adoption of large software applications at major corporations knows that there is usually a huge decrease in productivity every time a new app is implemented; moreover, this situation is made worse by the fact that new apps often increase rather than decrease the balkanization of data sources and the attendant political conflicts, spreadsheet profusion etc that hamper effective decisionmaking at large firms. The result is what every CIO and CEO dreads: IT "spaghetti", or thousands of applications jealously hoarded by senior managers across the organization, hideously difficult to integrate, upgrade and bring into line with how the users actually carry out their business processes.

I would expect that those firms which made the largest per-employee investments in external software applications during the last ten years are among the productivity laggards. The only firm I know of that has consistently used technology to drive huge productivity increases year in, year out, is a firm that develops most of its core applications internally. This same firm, acc to Gary Larson, was responsible for one-third of all US productivity gains from 1995-2000, and it ain't a technology company. (Hints: it's headquartered in Arkansas; no, it's not in the poultry trade.)

I do believe I've been politely slagged off a bit here. OK, I'll answer, though not at the length the topic deserves.

The organization thibaud refers to so coyly is none other than Wal-Mart, and they are indeed a model. They do the two or three most important things you can do in IT investment. They keep control, they keep their IT investment focussed on their business goals, and they have a realistic understanding of what it will actually cost over the entire life cycle. This means they get their money's worth. They neither overspend nor underspend. Nor do they expect a new IT system to immediately show it's full value. Unlike thibaud I surmise.

There is another very successful organization I will refer to. Let's call it Ali Baba as a generic name (there are multiple Ali Babas) . Ali Baba will come into your organization and promise to finally create that system which you have been trying to do for years at immense expense. They will quote you a price which seems stiff but doable (on as close to a time & materials basis as they can manage). Sometimes you will get a fairly decent system though at a cost far beyond your dreams. More often - not.

Basically you cede control and your senior management will not really know what is going on in that project. Costs will burgeon moreor less out of control. And of course you really have no idea what it will cost to actually run the thing if and when it actually makes it to deployment. Nor do you know that (yes, thibaud) productivity will actually go down - at first. With a completely successful system productivity will decline. If your sole benchmark is increased productivity in the first 6 months or year on a large newly deployed system, save you're money - you won't get it!

The lovely thing about the Ali Baba biz is that many organizations actually hire a series of Ali Babas - one after another. Without ever asking their senior managers to roll up their sleeves and dig into what is happening - where the money is going.

I call this gross managerial malpractice. I have an alternate proposal for such outfits. Gather together your most promising executives and ask them to take the challenge of bringing that project home successfully. Pay them very well (they will earn it) and promise (and deliver) the most glittering prizes you can offer for success. The next generation of top management will be promoted from that team. I'm not saying hand over the organization to the CIO types - just the opposite. Take line management and have them manage the IT project. This role is usually career death - the elephant's graveyard of the organization. Make it the opposite. Wal-Mart does.

If you're not prepared to go that far - to recognize the importance of the function - then don't complain about the poor IT guys, whether the lowliest programmer up to the lowly CIO. It's not their business, it's not their responsibility.

> Ali Baba will come into your organization and
> promise to finally create that system which you
> have been trying to do for years at immense
> expense. They will quote you a price which seems
> stiff but doable

They also destroy your internal IT organizations while they are at it, both indirectly (by insinuating to the purse-controlling manager that the work of the internal groups is not up to the par needed for such a complex project), and directly (by proposing "reinvigoration" projects). That sets them up to offer long-term outsourcing contracts, where they charge 3x the internal cost to provide 1/4th the service.

Cranky

If you let them, yes, Cranky.

Ted:

Ohio, Michigan, Indiana, western Pennsylvania, north shore of New York, etc.

Chicago is not typical of the rest of Illinois, or anyplace else in the rustbelt.

Columbus and Indianapolis are holding their own largely due to being seats of government.

Otherwise, four years after the end of the recession, it is preety grim.

There are almost one million people making a living or a good fraction of one selling on ebay.

Add hundreds of thousands or more on Amazon and a zillion other sites none of us have ever heard of, working out of their homes or small storage units. No commercial property to rent or buy, no trucks to buy, no employees to hire, no utilities to pay. I recently read about a guy selling $800K a year in beanbag chairs by mail for god's sake. He's about 23 years old.

Do you think Labor Department economists have any clue how to factor those folks in accurately? I don't.

People certainly seem to be spending a lot of money out there. Disneyworld is packed compared to a few years ago (we have an 8 y.o. son); Disney Cruise Line sells out routinely for thousands of dollars a cabin. Malls are packed. Downtown Chicago, for one, is overrun with shoppers.

There are 2 huge blobs of "dark matter" out there in the real world, hidden from government economists: 401(k) contributions and home values. The 401(k) contribution I make every payday is not only ignored as savings, but counted as spent. Also, the house we bought for 20% of its current market value doesn't count at all, except when we borrowed to build an addition and again to pay for college, it counted as spent.