[ECONOMICS] Productivity is Slowing Down
- The Big Economic Worry
Productivity Is Slowing
By Robert J. Samuelson
People producing more in a given time is the key to rising incomes
and easing societal tensions. And it's easier for government to do
harm than good.
The start of a new year is a good time to take stock, and there are
few better indicators of our long-term economic prospects -- and also
our prospects for political and social peace -- than productivity. As
anyone who's taken basic college economics should know, productivity
is simply jargon for efficiency. It's also what most people think of
as economic progress. The good news is that productivity has been
growing strongly; the bad news is that it may be moving to a much
To see why that matters, consult a fascinating government
report, "100 Years of U.S. Consumer Spending." A century ago,
Americans spent 43 percent of their incomes on food and 14 percent on
clothing. By 2002, those shares were 13 percent and 4 percent.
Meanwhile, family incomes (after inflation) had exploded. Filling the
spending gap are all the things we take for granted -- cars, TVs,
travel, telephones, the Internet. Home ownership has zipped to almost
70 percent of households.
This triumph of mass consumption is usually credited to technological
breakthroughs, from the assembly line to computer chips. But the
whole process is also described as productivity improvement. In 1900,
41 percent of Americans worked on farms. If mechanization, new seeds
and fertilizers hadn't meant that fewer people could produce more
food, we'd still be paying two-fifths of our income to eat. Labor
productivity is measured as output per hour worked. Whatever enables
people to produce more in a given time (machinery, skills,
organization) boosts productivity.
That in turn raises our incomes -- or gives us more leisure. It also
promotes domestic tranquility by muffling the competition between
government and personal spending. Slow productivity growth virtually
ensures a collision between the heavy costs of retiring baby boomers -
- mostly for Social Security and Medicare -- and younger workers'
living standards. Higher taxes will bite deeply into sluggish
incomes. The reason: What seem to be tiny productivity shifts have
Consider: In 2005, the U.S. economy produced $12.5 trillion of goods
and services, or gross domestic product (GDP). Per capita income --
the average for individuals -- was $35,000. If productivity growth
averages 2.5 percent a year, the economy reaches $34 trillion in 2035
(in constant 2005 dollars), estimates Moody's Economy.com. Per capita
income rises to $73,000. Now, suppose productivity growth averages 1
percent annually. Then GDP in 2035 is only $23 trillion, and per
capita income is $48,000. That $13,000 gain ($48,000 minus $35,000)
may look large, but it occurs over three decades, and part of
workers' gain would be taxed away to pay baby boomers' retirement
costs. Typical take-home pay would rise less than 1 percent annually.
Unfortunately, productivity growth seems to be decreasing. In the
past year it's been only 1.4 percent. By contrast, it averaged about
3 percent from 2000 to 2005. The fall-off partly reflects a mature
business cycle. As the economy slows, so do productivity gains. But
some long-term forecasts project that the poor performance will
continue. In Moody's Economy.com's outlook, productivity growth
averages 1.4 percent a year from 2005 to 2035. The main reason:
stunted business investment in new machinery, technologies and
buildings, says chief economist Mark Zandi.
"We don't save much as a nation, and we've gotten away with it so far
because overseas investors have been willing to finance our
investment," he says. But he doubts that will continue. As global
investors shift to other markets, big federal budget deficits will
compete increasingly with private companies for credit. Higher
interest rates will crowd out some business investment. Productivity
Maybe. But Federal Reserve Chairman Ben Bernanke has suggested that
the post-1995 trend (2.5 percent or higher) might persist for years.
In truth, economists have a dismal record in anticipating and
explaining productivity shifts. A big slowdown in the early 1970s
remains a mystery. Productivity gains averaged 1.5 percent for a bit
more than two decades, down from about 2.5 percent in the 1950s and
1960s. The post-1995 rebound was first attributed to computers and
the Internet. But its continuation after 2000 -- when high-tech
investment peaked -- suggests that other forces contributed. It's
unclear what they were.
The great frustration is that something so critical is also so
elusive. Productivity ultimately encompasses a society's entire
economic culture: its technologies, management, workers' skills and
motivation, schools, entrepreneurial spirit, work ethic, ambition and
risk-taking, the competitive pressure on companies, government
policies, financial markets. Everything counts -- and connects with
Therein lies a caution to the Democratic Congress and the Bush
administration. Although government can't easily dictate higher
productivity, its policies may perversely favor lower productivity.
What's politically expedient today -- a dubious tax break, a lazy
budget deficit, an expensive regulation -- may be economically
corrosive tomorrow. Don't ditch the future.