Bruce Greenwald: The Crisis Bigger than Global Warming
Manufacturing is dying on a global basis, according to Bruce Greenwald, and its collapse will mean the demise of economies – like China – that are highly dependent on exported goods. Contrary to what Robert Gordon and others have contended, productivity is growing in the manufacturing sector – roughly twice as fast as the demand for those products. If third-world countries don’t adjust their economies to reflect this reality, Greenwald said it would be a “crisis greater than global warming.”
Greenwald is the Robert Heilbrunn Professor of Finance and Asset Management at the Columbia Business School and is widely regarded as the leading authority on value investing, with additional expertise in productivity and the economics of information. He spoke at the 25th Annual Hyman P. Minsky Conference at Bard College on April 12.
“Manufacturing is done, and it is not anybody’s fault. The global productivity growth in manufacturing properly measured is 5% to 7% a year, and manufacturing demand is maybe 3% annually,” he said.
His views contrast sharply with that of Northwestern University Professor Gordon, who in academic papers and a recent book, The Rise and Fall of American Growth, has said that U.S. economic growth could decline to less than 1% annually, in part due to lower labor productivity, the result of reaching a plateau in the rate of technology innovation. Gordon has cited other factors – like demographics and the rising national debt – that will slow growth.
Gordon is “flat-out wrong,” Greenwald said, because he – like many others, including some who spoke on the same panel as Greenwald – are looking only at the macro economic data. Once you look properly at the productivity data – on a firm-wide micro level – a more positive story for growth emerges.
The global overcapacity in manufacturing is highly deflationary, Greenwald said, as is the distribution of wealth and income in the U.S. He offered prescriptions for both problems. But, first, let’s look closely at what he said about manufacturing and labor trends.
The hidden boom in productivity
Productivity occurs at the firm level, Greenwald said, and much of that data is hidden from economists who merely massage the macro data.
Research by the MIT Sloan Foundation has shown that firms can exploit productivity advances to gain huge competitive advantages, according to Greenwald. In banking, for example, he said that firms have been able to win market share by lowering costs, such as providing telephone support at one-half to one-third of the industry average cost.
Many of those advances have been highly episodic, he said, and in some cases productivity growth at the firm level has been negative. But studies have shown that when management allocates capital to improve processes, the results have been very powerful. Those types of process improvements are absent from the data that Gordon and others have studied, according to Greenwald. They have focused more on improvements from products themselves.
Fracking has shown the power of process improvements to boost productivity. Greenwald said that it drove the U.S. economy to the highest level of productivity among G-7 economies from 2000-2011, after lagging those countries historically. The U.S. achieved this through “seasoned” technology, not new technology, he said. “It is the fusion of technology that matters,” Greenwald said, “not the creation of technology.”