Tuesday, July 7, 2015

Germany vs Greece

Charles Hugh Smith recently pointed out:

Though German wages are generous, the German government, industry and labor unions have kept a lid on production costs even as exports leaped. As a result, the cost of labor per unit of output -- the wages required to produce a widget -- rose a mere 5.8% in Germany in the 2000-09 period, while equivalent labor costs in Ireland, Greece, Spain and Italy rose by roughly 30%.
I am not an apologist for corrupt government.  I cannot defend much of what the PIGS of Europe have done.

But I do want to point out that productivity growth first grows rapidly but then tends to stagnate in a mixed economy.  Some jobs are easier to automate than others.  For example, it is easier to automate drilling holes in an engine block (same location every time, same engine block that is stiff and simple to position) than it is to automate making floral bouquets (long, floppy flower stems that must be sorted for quality, and the application of certain aesthetic rules that are difficult to codify).

As the economy evolves, the low hanging fruit is automated early---eliminating people in those jobs--- thus leaving a larger and larger percentage of the surviving jobs as jobs that are heavy in tasks that defy automation.  The productivity stagnates after automation saturates the most productive applications and then starts to chip away at the more marginal applications....like the cashier at the local grocery store.  This is not my original observation....it is call Baumol's disease. (Another good article HERE)

The core of Germany's economy is/was amenable to automation and Germany showed gratifying leaps in productivity.

The core of Greece's economy is/was not amenable to automation and Greece...tied to the Euro....stagnated.  Perhaps, someday, robots will be able to economically make beds, drive cabs,  hand out pool towels and bar tend.

Automation comes with a price.  Once automated, producers are compelled to dilute their fixed costs by over-producing.  The financiers of those producers are compelled to enable sales via financing marginal buyers to protect their investment.  Sound familiar?

Further, every producer is burdened with high fixed costs and over produces.  Products that depend on brand value based on perceived scarcity find themselves in a precarious position.  Ultimately, automation has a heat-death-of-the-universe end....how does a nation demonstrate productivity gains after the last employee is eliminated?

That is only a slight exaggeration.  In 1992, General Motors employed 17,000 people in the City of Lansing.  Twenty years later that had dropped to 4000 employees.  Most of those 4000 employees are engaged in General Assembly, a job requiring flexibility and lots of manual dexterity.  Those wiring harnesses and hoses resemble flower stems more than engine blocks.  It seems improbably that General Motors will be able to run 2 automotive assembly plants with 1000 people in 2032.

Grab some popcorn.  This is going to get interesting.

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