Bruce Greenwald: The Crisis Bigger than

Global Warming
April 26, 2016
by Robert Huebscher

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

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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.”

“When you look at the firm level, the critical variable is the focus of management on day-to-day
improvement,” Greenwald said. “In the aggregate data, if you don’t pick the right years, you obscure
what is really going on.”

Looking at the data by presidential administration, Greenwald said that productivity growth rates have
been “perfectly negatively correlated” with the number of pages in the federal register produced by
those administrations every year. Carter was the biggest regulator in history, according to Greenwald,
when productivity growth was “essentially zero.”

Lessons from Japan and the Great Depression

The conventional wisdom surrounding Japan’s post-1990 difficulties has been zombie banks,
demographics, problems in its financial sector and failed monetary policy, Greenwald said. But the
underlying issue has been productivity growth, which in Japan was 3% higher than in the U.S. pre-
1990, but post-1990 it has been a half a percent below that in the U.S.

The differences between the two countries are more acute when you examine just the manufacturing
sector. Prior to 1990, Japan’s manufacturing productivity growth was 30% higher than in the U.S. But
that is when manufacturing’s death began, as global overcapacity grew. Japan had this “wonderful
managerial machine that worked so well and they focused it on a dead-end business,” Greenwald said.
Japan did not eliminate its manufacturing jobs at a fast enough rate.

When you compare the U.S. to Japan, pre- and post-1990, the hours worked were about the same in
both countries. But U.S. productivity was much higher, due to its faster transition to a service economy.

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The death of manufacturing in export-driven countries has paralleled the decline of agriculture in the
U.S. following the Great Depression, Greenwald said. Productivity in the agricultural sector continued
to improve through the 1920s, he said, despite commodity price collapses in 1921-1922 and again in
1929. By the end of the 1920s, farmers were producing more food than ever before, irrespective of
investment cycles, and prices collapsed, depressing farm income by approximately 80% from 1930-
1934. That was 35% of the U.S. population at that time, Greenwald said. It quickly became a global
issue, where “everybody tried to export their way out of the problem.”

But that cannot succeed on a global basis because the trade surpluses and deficits must sum to zero
across all countries. “The world can’t work its way out by exporting the problem,” he said.

The same thing is happening with the death of manufacturing today, Greenwald said. “Everybody is
trying to preserve their manufacturing sector and they are trying to do it by exporting,” he said. “The
Germans have managed to do it by destroying the rest of Europe through the fixed parity based on the
euro.” Similarly, Japan, China and other Asian countries have grown their manufacturing bases
through exchange-rate controls, running large and growing surpluses.

Korea, Thailand, Indonesia and Malaysia actually ran deficits for a while, he said, until fears over their
exchange rates caused them to collapse. “They destroyed their economies because of a foreign debt
burden,” Greenwald said. “They went from deficit to surplus, and they’ll never run in deficits again.”

Someone still has to “eat” those surpluses, Greenwald said, and that is the U.S. As the provider of the
reserve currency, the U.S. economy is the “consumer of last resort,” running a persistent trade deficit.

The silver lining

Just because manufacturing is dying, it doesn’t mean that profits will fall. Indeed, Greenwald said,
profits are likely to rise among U.S. corporations.

The U.S. economy is much farther along in its shift to a service-based economy than the rest of the
world, and its firms will enjoy certain benefits. One is that service-based industries enjoy greater
barriers to entry and economies of scale. Once a service business – such as a distributor – achieves a
market share of 20% to 25%, it becomes very difficult for a competitor to enter the market, he said.

“It’s not an accident what the stock market is doing now,” he said. Since 1990, profits as a share of
national income have risen from approximately 8.5% to about 14% he said, mostly the result of the
concentration of service industries.

Much of that shift is hidden if one looks merely at the S&P industry classifications of corporations,
according to Greenwald. John Deere, for example, is still classified as a manufacturing business. But
much of its profits – and its dominant market position – is derived from service-oriented activities that
are performed in local markets. Those include machinery servicing and technology, which now allows
huge tracts of farmland to be plotted with GPS systems and planted with seeds using un-manned
tractors.

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Income inequality and other problems

The death of manufacturing has contributed to what Greenwald called a “big problem” with the
distribution of income in the U.S. Roughly the top 20% of the population has about 50% of the income,
and they save 20% of their income, he said, resulting in a 10% savings rate. But the overall savings
rate in the U.S. is approximately 5%, he said, so the other 80% of the population is dis-saving 10%
(i.e., spending 110% of their income) since they have the other 50% of the income.

That is unsustainable, he said. When gas prices fell and consumers had a little extra money, it should
not be surprising that they did not spend it, according to Greenwald. They used it to reduce debt. The
same would be true, according to Greenwald, if taxes were reduced; it would not spur spending or
consumption.

“This is a chronic deflationary bias,” he said.

On top of that, Greenwald said the pension debt facing state and local governments – driven low
interest rates that have increased the present value of liabilities and depressed investment growth –
has limited their ability to provide necessary services.

A bold solution

A global glut of manufacturing capacity – and the growth of service industries that are not capital
intensive at the margin – have driven down investment spending. Unless something is done about the
consequences of the distribution of income, Greenwald said that investment is not likely to pick up.

The solution, he said, would be a “massive negative income tax” similar to an earned-income tax credit.

“If you are going to correct these income inequalities,” he said, “you have to do it on a sustained basis.”
Greenwald said that policymakers must face the fact that they must compensate for the inevitable
need for low-paying jobs. If someone, for example, earns $9,000, they would be given a $2,000 earned
income tax credit. This would need to be a permanent, structural change, he said, and not a cyclical
policy meant to address a recession.

To address the international imbalances – where every country tries to export, leaving the U.S. as the
consumer of last resort – Greenwald said the solution is for the “IMF to print money,” rather than the
U.S. supplying it and using it to pay for its imports. He did not elaborate on this point during his
remarks, but he has previously advocated for the IMF to control global currency flows by issuing
special drawing rights (SDRs). SDRs would be a global currency with issuance that is calibrated based
on the trade surpluses or deficits of individual countries. It would be implemented in such a way as to
prevent the run-up of large surpluses or deficits, and would effectively remove the ability of a country to
use its exchange rate as a competitive weapon in trading.

Without such solutions, the consequences will be dire, according to Greenwald. As manufacturing
productivity rises, he said, the value of low-cost labor, which has been the export-led path to
development, gets smaller. “That growth model is going to disappear over the next 25 years,” he said.

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“You are going to need a source of institutional support for those countries that is permanent and that
would also relieve the pressure of these international imbalances,” he said. “I would focus on long-term
structural changes, not short-term cyclical interventions.”

Without such policies, he said, it will mean the end of the countries in Europe and Japan that continue
to focus their management attention to a dying industry, which is manufacturing,

“Otherwise, Robert Gordon is going to be right,” he said, “but not for the right reasons.”

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