Being More Productive...Can be Really Destructive!

An article by Reuters, "Consumers fall deeper into debt: Equifax" got me thinking about productivity. The article talks about consumer credit card debt. Some extracts...[[[ "Dann Adams, president of U.S. Information Systems for Equifax Inc, said the already high rate of personal bankruptcies could increase. "We've seen a continued ramp up of delinquencies across the board," he said. That would pile more bad debt on banks already struggling to cope with heavy mortgage-related losses.
Consumers are missing payments on mortgages, credit cards, and auto loans, Adams said, adding that Americans may be growing more reluctant to take on new debt and more willing to save. Economists have long warned that U.S. households were taking on unsustainable levels of debt, pushing the savings rate near zero. But although increasing savings and reducing debt can contribute to consumers' financial health, if Americans further tighten their purse strings now it could worsen the recession.

VICIOUS CIRCLE-What happens in this type of economy is that consumers and businesses get caught up in a vicious circle, where they fall behind on payments, banks clamp down on credit, and the economy deteriorates further.]]]

The economists quoted here are missing the fundamental point about demand, productivity and quality.
Let us take demand in a given year t for some capital equipment, like TVs.
In general, the demand D(t) = N(t) + RD(t)+ RU(t) where N is the New demand from people who currently do not own the product, RD is the demand related to Replacement of existing product because it failed or is defective, and RU is the demand related to upgrade of an existing working product.
Therefore the change in demand is
D(t+1)-D(t)= N(t+1) - N(t) + RD(t+1) - RD(t)+ RU(t+1) - RU(t)
N(t+1) - N(t), over the long term, is related to growth of population or households. In the U.S. based on Census projections, the overall growth is less than 1%
RD(t+1) - RD(t) is a key term. As QUALITY INCREASES, the percent of units that fail within a specified time period from manufactured date should decrease. For example, if 10% of TVs made in 2003 died within 5 years, the percent dying within a 5 year period for TVs made in 2008 should be less than 10%, due to increases in various quality measures.
RU(t+1) - RU(t), the UPGRADE factor, is dependent on many variables. Does a newer version offers significantly more benefits than the current one owned? It is established that major jumps in innovation do not occur with a specific periodicity. Do changes in the environment make the current unit unusable- which is the current situation with analog TVs as the broadcasters switch to Digital signals? This factor causes a limited, one time jump in upgrades. Other factors include "looking cool" and so on. However, based on my data collection, more of the young people are taking their environmental responsibilities seriously. They are extending the life of current gadgets, and doing reuse as much as possible. This big push towards being green means that people will extend the life of currently owned products, will reuse/recycle, and will reduce. Taking all these into consideration, the increase in RU should decline over time, and RU (t) itself may even decline.
All these factors indicate that demand itself should be flat or grow slowly over the long term, in general.
Now, the PRODUCTIVITY factor.
Assume that Demand D(t) is 1 Million. If one person can make 2000 per year, working 50 weeks at 40 hrs/week, this needs 500 people. If PRODUCTIVITY INCREASES by 5%, for example, while Demand increases by 1%, only 481 people are needed. In order to keep all 500 people employed, everyone has to work about 12 days less in a year, in this example. Therefore large productivity gains are a negative for employment, especially in a slow demand growth environment.
So, the message for young folks- go forth and "surf away your time!"