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[ECONOMICS] Productivity is Slowing Down

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  • madchinaman
    The Big Economic Worry Productivity Is Slowing By Robert J. Samuelson http://www.washingtonpost.com/wp- dyn/content/article/2007/01/02/AR2007010200943.html -
    Message 1 of 1 , Jan 11 11:04 AM
      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
      slower path.

      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
      huge consequences.

      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
      will suffer.

      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
      everything else.

      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.
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