Why are we substituting labor for capital? The Department of Labor reported last week that “labor productivity decreased 0.9 percent” in the first quarter of 2023. “The 0.9 percent productivity decline is the first time the four-quarter change series has remained negative for five consecutive quarters; this series began in 1948.” In addition, the Labor Department reported: “Real hourly compensation, which takes into account consumer prices, decreased 0.3 percent in the first quarter of 2023, and declined 1.0 percent over the last four quarters.”

This means that despite record low unemployment, the wages workers actually receive after inflation buy less. People are working more but getting poorer. The president likes to brag about job growth, but if this keeps up, the U.S. will eventually become a poor and miserable place.

In the mid-1980s, on a trip to China, the renowned economist Milton Friedman was shown the construction site of the massive Three Gorges Dam. Friedman noticed that many of the workers were using simple shovels, so he asked his Chinese hosts why they were not using more modern heavy-construction equipment. One of them replied that it was to keep employment high. Friedman said that if that were true, “why not give them teaspoons?” Within months, most of those with hand shovels had been replaced by workers using large construction machines.

Early man gained an advantage over animal competitors by using tools — spears, bows and arrows, fishhooks, etc. — both for protection and food. Beginning in the 18th century, tool innovation took a quantum leap, notably with the commercialization of the steam engine, which freed mankind from the drudgery of physical labor. This Industrial revolution enabled a sustained improvement in living standards for the first time, where each generation could expect a better life than the previous one.

Notably, Britain and the Netherlands, followed quickly by the United States, created financial institutions that allowed for the safe accumulation of capital that could be invested in productive factories and projects, allowing more and better output of almost everything. Despite fears that the new labor-saving machines would lead to mass unemployment, just the opposite happened.

Workers freed from the drudgery of hard labor were able to find more productive work in the new industries. The steam engine enabled the steamship and railroad industries that employed vast numbers of workers in jobs that did not previously exist. Most people are now employed in jobs that did not exist at the time of the American Revolution or even a few decades ago, and at much higher wages than could have been imagined even in the recent past.

The average Walmart Supercenter has an estimated 120,000 different items for sale. The average general store of two centuries ago may have had several dozen different items for sale. Someone is making all of those things you find at your retailer. Even if you assume that 40% of the stuff is made in China, that still leaves an enormous quantity of stuff being made by Americans in America.

The global economy had been working remarkably well up until two years ago — most everyone on the planet (including most Americans) were making higher real wages (wages were growing faster than inflation) in the industries where they could best compete while having more consumer choice of goods and services at declining real prices. And nongovernment-induced famines had been eliminated.

What has gone wrong? Most of the jobs that have been created in the first quarter of 2023 have been in “healthcare and social assistance, food services and drinking places, and in government.” Relatively few of the jobs in health care and social assistance lend themselves to rapid productivity growth. Fast food and some other food service businesses have found ways of increasing productivity, but the productivity of the servers in the typical restaurant or bar has probably not grown much since the Middle Ages.

Government jobs as often as not create negative productivity growth — given that so many are involved in producing and enforcing regulations which drive up business costs. Even well-meaning little things government does cause economic drag. Last week, the Miami government decided to add bike lanes on a major street in Coconut Grove. The bike lanes take away two motor vehicle traffic lanes, thus slowing traffic. This slowdown adds to the cost of those who use the street for deliveries, etc. Yes, it is minor, but the millions of minor actions by government without thinking through the cost vs. benefit in the aggregate cause considerable economic drag.

A society gains wealth when productive and innovative machines (which include computers and even artificial intelligence programs) replace people because they are more cost-effective, enabling people to do new or more things that machines cannot do. In the last couple of decades, low inflation and interest rates, productive capital investment and new high-paying jobs flourished. Now it is reversed as a result of all the new taxes, regulations and counterproductive government spending by the “woke” environmentalist Biden administration. The cost of capital for most businesses and homeowners has risen sharply — which will result in less new investment and lower productivity growth — continuing the two-year decline in real wages, and eventually a decline in total employment.

Economic policy that celebrates teaspoons over power shovels will impoverish all.

• Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.


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