Views > March 15, 2007 > Web Only

Productivity: Is The Boom Over?

By Dean Baker

While it may sound like an obscure detail for economics nerds, the Department of Labor’s latest data on productivity growth should be causing a greater stir, because it is hugely important for the economy and people’s lives.

In the mid-’90s, the rate of productivity growth unexpectedly jumped from 1.5 percent a year to more than 2.5 percent year, where it stayed until the middle of 2004. But since then, the new data show that productivity growth has dropped back down to just a 1.5 percent annual rate. It is too early to pronounce the end of the ’90s growth spurt, but it is certainly not too early to be concerned.

Productivity growth is the main long-run determinant of living standards. It measures the value of goods and services produced in an hour of work. If productivity increases rapidly, then workers can enjoy substantial and sustained gains in living standards. This can mean more goods and services (including items like health care and education) and it can also mean more leisure, so that workers can sustain the same living standard even as they work fewer hours. More rapid productivity growth also makes it easier to address problems like global warming, since an economy with rapid productivity growth can more easily divert resources toward reducing greenhouse gas emissions while still raising standards of living.

For these reasons, we should be very concerned about the rate of productivity growth. While distribution is extremely important—at a point in time, more for Bill Gates means less for everyone else—it is a lot easier to accomplish almost any goal (including redistributing income) in the context of rapidly rising productivity.

It would be easier to gauge the course of future productivity growth if economists had a better idea of what caused it. However, the two big changes in productivity growth trends in the post-war period both caught economists by surprise.

In 1973, the rate of productivity growth slowed sharply, after a quarter-century of rapid growth. Even today, there is no widely accepted explanation for this slowdown. And when the economy upturned in 1995, economists also had no explanation. While everyone knows that computers and information technology were central in this boom, computers (even PCs) had been around for decades without having any measurable impact on productivity growth. It is not clear why computers suddenly led to a productivity boom at that time.

Since we don’t know what caused the upturn, there is not much basis for saying if and when we should expect the burst of productivity to come to an end. But we can certainly speculate on some factors that could play a role.

At the top of my list is the fast money game being played on Wall Street with hedge funds and other forms of creative finance, which can have negative effects on productivity growth for two reasons. First, economic theory tells us that workers will respond to incentives, which means that many highly educated people are running to careers on Wall Street in pursuit of multi-million dollar paychecks, instead of careers in computers, engineering, medicine and other productive areas. And second, many of the buyouts may be structured primarily with the goal of generating fees for agents rather than creating viable productive companies. We’ll know more about how these deals turn out after the next recession, but anyone who thinks that the high-rollers always know what they’re doing need only think of Time-Warner. The world’s largest media company sold itself for AOL stock at the peak of the Internet bubble. In a couple of years, the AOL stock was almost worthless, which meant that Time-Warner had sold itself for almost nothing.

There are other potential villains on the productivity front. Diverting resources to the military drains them from productive uses. Similarly, our patent financed systems of drug and software development are hugely inefficient. And of course, leaving much of our population poorly educated and locking up more than 2 million people in prison doesn’t help productivity either.

Raising productivity growth is not easy, and at this point the data do not yet clearly show that we have a problem. However, the stretch of slow productivity growth has persisted long enough that it should be getting serious attention.

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• Reader Comments

  I wish there were more articles on ITT regarding the economy. What has been presented in this one merely skirts the edge of the complex house of cards our economic system has become. Productivity is a significant indicator. But to simply allude to hedge funds and other machinations on Wall Street without examining derivatives and the game being played regarding the dollar’s status as the reserve currency is to fail to address the debt culture that underlies most of our problems.

  It seems part of our conundrum is we are all bombarded with such an overload of information in these times that most rarely take time to read subjects over 500 words in length. Unfortunately the dilemmas that confront us have an increasing level of complexity. Most are poorly served by an executive summary format. And so it goes.

  Posted by recursive prophet on Mar 15, 2007 at 12:25 PM

  Productivity gains and wage gains have not been tied together for at least the last 10 years. The gains in ‘productivity’ have been the source of the widening profit margins of corporations during that period. It doesn’t surprise me that, with many states now passing legislation mandating increases in the minimum wage, ‘productivity’ (i.e., profit gouging at the expense of workers) has taken a minor hit. What surprises me is that In These Times would post an analysis that didn’t recognize this state of affairs for what it is.

  Can we please look at ‘indicators’ that have some bearing on the wages and quality of life enjoyed by working people, rather than assuming that what’s good for Exxon (Wal-Mart, Pfizer, Microsoft...) is good for America?

  Posted by peachmcd on Mar 16, 2007 at 8:00 AM

  Over or not, productivity certainly has been OVERRATED!

  Let’s take a look at two points from the article:

  1. Productivity growth… “It measures the value of goods and services produced in an hour of work.”

  2. “ While everyone knows that computers and information technology were central in this boom, computers (even PCs) had been around for decades without having any measurable impact on productivity growth.”

  What has accounted for the increase/decrease in the productivity numbers? 
  To look good, companies, financial gurus, government agencies can simply use a new yardstick.
  
  Official data measuring has changed over the past couple of decades largely due to elastic scales. Hedonics have made equipment values float — if a new piece of equipment cost twice as much out of pocket, but was four times as fast — it “cost” you half as much. (Try banking those savings.)

  Comparisons have gone increasingly short term — monthly, yearly, but seldom 10, 20, or thirty years.
  
  How many “Made in U.S.A.” comparisons ignore the subassemblies from foreign facilities?

  Since the boss’s secretary can now book flights on the internet, travel agents are eliminated, she also does the company newsletter, Power Point presentations, and a whole list of other new tasks — but who’s measuring her productivity? Compared to what?

  With the incentives to leave early many former tasks have disappeared and new ones added with no one to set a benchmark. In even a small to medium size company, who knows? Middle and upper management were the last to learn anything about computers — all they know is what the ads (and “experts” like the Fed) have told them.

  In a one person business like mine it was fairly easy to keep track of productivity — After the first ten years of digital versus pre-computers, I found I spent 27.3% more non-billable time at work.
  
  There is no question some processes are faster, some things are better, most are just different.

  The biggest downside is the shortfall of those wonderful, new tech jobs people like Thomas Friedman are fond of talking about. Tech induced productivity “allows” (requires) many tasks to be done by many fewer people for far less money.

  Remember who used to take care of your phones?  Filled your gas tank? Who does it now?

  Posted by whattheheck on Mar 16, 2007 at 9:05 AM

  Another effect of increased productivity is increase unemployment.  If 8 workers can suddenly produce what it used to take 10 workers to make, 2 workers will soon be unemployed.

  I don’t have a link handy, but there have been numerous stories that increased productivity due to techonological advances has caused more lost jobs in the US than globalization and outsourcing.  This is a two-edged sword, because the productivity of US workers (largely due to an excellent infrastructure, automation, and other tech advances) is one of the things that keeps higher paid US workers competitive with lower paid workers in developing states.

  Posted by oliver cromwell on Mar 16, 2007 at 10:09 AM

  “Over or not, productivity certainly has been OVERRATED!”

  I don’t think so. The time it takes to obtain the necessities of life (shelter, food, clothes, etc) is at a very low point. Folks living in primitive cultures (e.g., the Kombi in West Papua, a stone age level people) spend most of their time working hard to eke out meager existences. Even the “poor” in the US and other developed countries live a materially rich existence compared to how most people lived 100 years ago. I think this is due to extreme increases in productivity - how we raise food, wash clothes, get around, etc etc etc. We are very fortunate to live in times of plenty.

  Perhaps the real problem is that expectations grow faster than productivity? No matter how much we have we always want more and better. This is the treadmill that leads to discontent.

  Of course, all things change and times like this never last forever. Best to enjoy it while it lasts (and prudent to tread lightly, both as cultures and individuals).

  Posted by wolf on Mar 16, 2007 at 1:01 PM

• extended discussion >>>Continued...

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Also by Dean Baker

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• Victory in the Medicare Drug War?
  
• Numbers Before Politics
  
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• The Economy
  

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