Lower Hospital Capacity

It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling
--Boston

One difference between manufacturing and service operations involves their composition of productive resources. In manufacturing processes, equipment serves as the primary factor of production. Equipment leverages the amount of output that workers can produce. Capacity, defined as the maximum amount of output possible from a production process, is generally determined by how much equipment has been installed to support labor.

In service-based operations, people are usually the primary factor of production. Although facilitating equipment may be employed, people generally control the pace and composition of output in service operations. Obtaining more output in service sector settings commonly requires hiring more workers.

With vaccine mandates now being imposed in many organizations, workers are being fired for non-compliance or leaving in advance of compliance deadlines. Several recent headlines have highlighted the situation in hospitals, where large groups of nurses and other workers are resigning or or threatening to resign in defiance of vaccine directives in their organizations.

Hospitals are prime examples of service sector operations that depend on people to produce output. The fewer doctors, nurses, and other staff personnel, the smaller the number of patients that hospitals can treat. By imposing vaccine mandates that cause workers to hit the silk, hospitals are essentially reducing their productive capacity.

When you hear that hospitals are being 'overrun' with patients, recognize that this may be due to self-imposed capacity limitations. Vaccine mandates may lead to fewer workers. Fewer workers mean fewer patients can be treated. Therefore, hospitals may reach capacity limitations when far fewer patients seek treatment than in the past. 

Negative Productivity Trends

Gonna pack my lunch in the morning
And go to work each day
And when the evening rolls around
I'll go home and lay my body down
And when the morning light comes streaming in
I'll get up and do it again
--Jackson Browne

These pages have observed downtrends in productivity growth--particularly over the past ten years. After the Q3 number printed at -0.3% earlier this week, people are once again wondering what is going on.

Let's look at the productivity series. Below we see the annual percentage change in productivity (i.e., output per hour worked) in 'non-farm business' (i.e., manufacturing and service sectors excluding agriculture).

Ignoring measurement challenges (e.g., how to accurately capture all hours worked?), it is clear that productivity has been declining over time--with perhaps some pushback inspired by the productivity-boosting info tech movement in the late 20th century. Although I don't have statistical capability right this moment, I would bet that a linear regression model fitted to these data would find a negative and significant slope.

What is grabbing people's attention is that the variation that accompanies the data points in this downtrend is beginning to touch, or cross zero with increasing regularity.

What is driving the decline? While many theories are being advanced, it seems to me that the central cause is this: dwindling savings.

To improve productivity, humans need tools that they can combine with labor to produce more output per hour. In order for some people to produce those tools, however, they must forego producing food, clothing, and other vital resources necessary for their own survival. The toolmakers live off of resources that others have set aside (i.e., savings).

Savings that fund tool production are often referred to as capital. When people save less and consume more, there is less capital. Less capital means less tool production. Less tool production means lower propensity for productivity improvement.

When people consume everything they make and dip into past savings to fund their immediate lifestyles, then they are engaging in capital consumption. When government debt is factored into the mix, savings rates in the US have been increasingly negative for some time.

Negative savings rates are driving productivity decline--a decline which will surely compromise standard of living if it continues to persist.

Forest Management

Some say she's alright, some say she'll never learn
Some rush into things, some stand and wait their turn
I've been here all along, standing here all this time
But you never noticed, just let the same tired flames burn
--Bruce Hornsby & the Range

Thirty five years ago I was completing my first six months in the working world following college graduation. I was a process engineer working for a large paper manufacturer in Wisconsin. The company had an excellent orientation for new management hires that included a road to our timberland operations. Me and another half dozen of that year's cohort jumped in a van and headed north to the woodlands as the fall leaves lit up the countryside.

Two lessons learned from our foresters on that trip stuck with me. One was that trees are like any other crop. They can be planted and harvested. The difference between growing trees and, say, corn is the time it takes for a crop to mature. Forest product companies and the consumers of their products are no more 'killing trees' than farmers and their consumers are killing corn.

The second lesson involved practices in good forest management. Remove dead and blighted trees. Thin out growth. Create space and buffers. Many of these practices were oriented toward containing damage caused by wildfires. Companies in the area had painfully learned this lesson thru experience. In fact, I regularly drove thru thousands of acres of unmanaged forestland south of town that had been decimated by wildfire 10-20 years earlier.

Today's 'environmentalists,' particularly the younger generation brainwashed by an equally ignorant older generation of grade school, high school, and college instructors, revolt at the notion of messing with the natural 'look' of a woodland.

As such, we are vulnerable to catastrophes like the current wildfires raging across California. That's the PCH at Malibu above.

The president is correct in calling such ignorance out.

1850

"You see, grandfather scratched the Scott mills to life with nothing much but his bare hands."
--Paul Scott (Valley of Decision)

In 1850 the US was in the midst of a productivity-led expansion. The country's population had more than quadrupled since the turn of the century. Innovations were driving spectacular increases in productivity. Agricultural output more than doubled from 1840 to 1860 while the value of manufacturing and mining industries nearly tripled during this period.

1850 $20 PCGS XF40 CAC

A bottle of port cost about 10 cents while a pound of coffee cost about 80 cents. Pianos could be purchased for less than $200 and a routine doctor's visit cost $2. A new home in Brooklyn cost $2,500.

With a sound money and improving productivity backdrop, prices would generally remain stable or decline during the second half of the 19th century.

South Side Skyway

Well the South Side of Chicago
Is the baddest part of town
--Jim Croce

When driving to Chicago, one of my favorite parts of the journey is the leg from Gary, Indiana to Chicago's South Side. Lots of old factory buildings including a panoramic view of the US Steel Gary Works. Periodic glimpses of Lake Michigan shoreline add to the treat.

The leg also features the Chicago Skyway, a toll road that includes a giant bridge spanning the Calumet River just over the Illinois state line. When the City of Chicago leased control of the Skyway in 2005, it marked the first privatization of an existing toll road in the US. In my travels, upkeep of the Skyway has been far superior under private ownership.

Above is a pre-Skyway pic of the Calumet Harbor taken in 1929. Today, the Skyway crosses the Calumet at the High Bridge after the river bends to the left. The commanding view afforded from the High Bridge suggest things have changed little in nearly eighty years. Perhaps a few less smoke stacks, but still lots of old steel-laden infrastructure from a golden age of production.

Insight into yesterday worth today's toll bridge price.

Jim

Keith Davenport: You've got to help them out, Frank, or they will walk out on you. That'll be a worse failure than mine ever was. 
Frank Savage: Give them something to lean on?
Keith Davenport: Call it anything you like.
Frank Savage: Keith...I don't believe it. Here's where we part company. They're not boys. They're men. Too bad they have to find out about it so young. How old is Bishop? Twenty one, maybe. It's tough to have to grow all the way up at 21. But that's the only way we're going to get it done. And I think they can do it. Lean on somebody? I think they're better than that. And it that's not true, then we're a dead duck.
--Twelve O'Clock High

Fresh out of school, I went to work in a factory as a process engineer. My role was technical support, particularly project work aimed at improving products and processes.

We had a production manager named Jim. Big guy, smoker, balding. As production manager, Jim was ultimately responsible and held accountable for all that occurred in daily operations. Quantity, quality, equipment maintenance, personnel safety. That Jim was prematurely graying was probably no surprise as his was the ultimate high pressure job in the mill.

Jim's management style was authoritarian. This did not mean that he did not listen to, or frequently seek out, the viewpoints of others. But at the end of the day he preferred to make the decisions--in a forthright and often blunt manner.

His gruff approach irritated many managers. More than one viewed him as a dictator who managed by edict. "Here comes your buddy," one of my process engineer colleagues once said to production superintendent when he noticed Jim strolling down the noisy production floor toward them. "He's not my #$%^ing buddy," the superintendent replied.

At least on the surface, Jim didn't appear bothered that he was not well liked. Sitting in Jim's office shooting the breeze one afternoon, a friend and I suggested to Jim that his decision-making style wasn't winning him many friends. "I'm not here to make friends," he quickly shot back.

Although Jim's style rubbed many the wrong way, his results were superb. His tenure as production manager coincided with record performance for the division. However, his fine results did not preclude many from holding grudges.

Did Jim truly not care that his approach to management did not win many of his associates over? I don't know. I am pretty certain that Jim would say that he was being completely transparent with his forthright manner, that he would not compromise his behavior in order to gain popularity.

There was much to learn in those early years. Although I didn't realize it at the time, Jim was one of the lead instructors.

Strong Manufacturing

Well we're living here in Allentown
And they're closing all the factories down
--Billy Joel

Common wisdom has it that US manufacturing is on the decline. Data to support such claims are usually percentages of US GDP tied up in manufacturing--which indeed indicate that the fraction of US output attributed to manufacturing has been declining for years.

On an absolute basis, however, the value of US manufacturing output has been increasing. Currently, America produces more manufactured output than any other country (with the exception perhaps of China). And the value of US output exceeds the total output of most other countries ($2 trillion+).

When viewed in this manner, US manufacturing can be seen as very strong rather than weak and getting weaker.

Production Diversity

Well we're living here in Allentown
And they're closing all the factories down
Out in Bethlehem they're killing time
Filling out forms, standing in line
--Billy Joel

Trade theory 101 posits that two locales benefit most if each focuses on producing a particular output and then trade with each other. Productivity should be higher because of learning effects and lower switching costs. More wealth is therefore created to spread among people in both locales.

However, this stance assumes a static world that does not appreciably change. In reality, taste preferences and innovation evolve which renders production technologies obsolete over time. Locales that limit production to a few specialties to particular production specialties expose themselves to the risk of producing output that no one wants.

The finance analogy is the investor who positions his entire portfolio in a single stock. Unanticipated problems with the underlying company's operations could send the stock lower. Because the value of the investor's portfolio is entirely correlated to the performance of a single security, it is vulnerable to uncertainty.

Just as it is prudent for investors to spread risk over multiple securities, communities will be more robust if they are populated by a variety of producers. Manufacturers, service providers, big, small. The more variety, the better.

Communities that overspecialize with respect to size (e.g., catering to large producers) or sector (e.g., service over manufacturing) increase risk of economic stagnation or worse.

Tape It Up

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Nice expression of government intrusion in markets. Over the past 60 yrs, govt employment has quadrupled, while manufacturing employment has been cut nearly in half.

One more data point demonstrating that distance from free markets is growing, not shrinking.

Why Can't We Cooperate?

A thousand skeptic hands
Won't keep us from the things we plan
Unless we're clinging to the things we prize
--Howard Jones

In a speech at a liberal pre-election rally last weekend, comedian Jon Stewart wondered aloud why Americans can't work more collaboratively to solve our nation's problems. He cited examples of people from diverse backgrounds who work together daily. Why can't we have more of that?

Stewart was describing examples of market activity. Markets are people engaging in exchange. People do so because they have needs that they want to satisfy (self-interest is axiomatic to human behavior), and cooperative exchange helps individuals achieve higher levels of satisfaction than otherwise possible.

Markets are not just associated with material exchange. There are also markets for ideas, knowledge, companionship, power, etc. Indeed, gains from market exchange may be more psychic than material.

Markets, then, constitute a basic form of social organization.

In unhampered (a.k.a. 'free') markets, property rights of the individual form the basis for exchange. This means that an exchange can only occur if both sides voluntarily engage in the trade. This holds true in product markets, where spectacular chains of widespread voluntary cooperation often assemble to produce even the simplest of products.

The same principle holds true in non product markets. For example, if I have an idea about how the world should function, then I can offer it to others but I cannot force them to accept it. I also cannot coerce others to do things in order for my vision to become reality.

Unhampered markets promote freedom because property rights are respected, meaning that exchange is done on a voluntary basis.

Circling back to Jon Stewart's question, then, one possible answer is that there are not two sides to 'the market for voluntarily solving problems at a national level. Current ideas/programs being offered by some (sellers/supply) have found insufficient support among those necessary to convert those ideas into reality (buyers/demand).

This answer is not totally satisfactory, however, because it does not address the very real possibility that an unhampered market do not exist in this case.

We'll continue this discussion in future missives.

GM and Them

If you let them do it to you
You've got yourself to blame
It's you who feels the pain
It's you who feels ashamed
--The Who

Classic example of government intervention gone awry. When GM wanted to build a Cadillac plant that would straddle Detroit and the municipality of Hamtramck in the early 1980s, it approached local government for help in clearing out local residences.

Politicians were happy to oblige in the name of 'jobs' (read: votes). They wound up evicting protesting residents of Poletown to make way for the factory.

Det-Ham went down as one of the biggest disasters in facility layout and automation gone awry. Today it operates at a fraction of original capacity, and is tooling up for a big bet on the hybrid Chevy Volt.

Government intervenes in the name of big business. Big business bombs but persists. Citizens get hosed. Sound familiar?

btw, a picture of GMs Michigan area capacity, then and now.

no positions