TCS Daily


The Good News About Productivity

By Arnold Kling - July 8, 2004 12:00 AM

"This story of positive structural changes in the American economy -- the very rapid growth of potential output -- is the big story about the economy during the past four years. It's important both at the macro level -- why is output-per-man-hour 20 percent higher than it was five years ago? -- and at the micro level -- how are people today doing their jobs and being 30 percent more productive than their predecessors of a decade ago? The news media aren't covering this well. Yet it's the really big story about the economy in the Twenty-First century." -- Brad DeLong

Productivity is probably the single most important economic statistic. Productivity is what determines our standard of living. In the long run, productivity is what determines how much workers are paid.

(In the short run, wage growth sometimes diverges from productivity growth. If there is a sudden surge in productivity, it usually takes a couple of years for this increase to work its way into wages. Conversely, if there is a productivity growth slowdown, as in the 1970's, it takes a while for wage growth to slow down to match.)

Sustained high productivity growth would cancel out any possible economic worry. Global competition from low-wage workers? High productivity would protect our standard of living. Rising costs from Medicare? As I pointed out in The Great Race, high productivity would make the welfare state affordable (although not optimal). Environmental quality? High productivity would give us the resources to devote to addressing any challenge. On the other hand, low productivity growth would mean that our incomes will be low, our tax burden to pay for entitlements will be high, and environmental issues will be much harder to address.

Exceptionally Good News

As DeLong points out, in recent years the news about productivity is exceptionally good. The table below shows the four-year change in productivity for the first quarter of every Presidential election year since 1960. (The measure that I use is output per hour in the nonfarm business sector, as reported by the Bureau of Labor Statistics.)

Year

Productivity Growth
(% Change from
prior 4 years)

1960

12.0

1964

12.8

1968

12.2

1972

7.9

1976

9.1

1980

3.6

1984

6.2

1988

6.9

1992

8.1

1996

4.9

2000

9.5

2004

17.0

The table helps to demonstrate what Brad DeLong is talking about. The 17 percent productivity growth from the first quarter of 2000 to the first quarter of 2004 stands head and shoulders above the growth rate for any comparable period. In fact, it is better than any eight-year period since 1976. In the first 13 quarters of the Bush Administration, the basic determinant of our standard of living increased by almost as much as during the entire 32 quarters of the Clinton Administration.

Presidential Credit?

As far as I know, President Bush has not claimed credit for the phenomenal productivity growth that has occurred during his Administration. Nor should he. As Dick Cheney said when asked during the Vice-Presidential debate whether he was better off in 2000 than he was four years ago, "Yes, but government had nothing to do with it." Productivity growth in any given Presidential term is affected much more by private sector trends and by policies of previous Administrations than it is by current policies. I think it will be years before we know how much, if any, the Bush Administration's economic policies affected productivity.

The most likely explanation for the faster productivity growth of recent years is the gradual diffusion and exploitation of computer technology. For example, as Virginia Postrel pointed out, "computers have finally gotten powerful enough to collect the data and deliver the problem-solving solutions that [Operations Research] has been promising since the heady days of the New Frontier. Beginning in the 1980s, when American Airlines demonstrated that airlines could save billions of dollars using O.R. techniques to design their schedules, O.R. has become an increasingly important, though largely invisible, contributor to rising productivity."

Why Is Increased Productivity Not News?

In her weblog, Postrel speculates about why the productivity story is not covered in the media. She points out that productivity gains are diffuse, incremental, and technically subtle, which makes for a story that editors see as boring and difficult to report. It certainly has those factors going against it. Even when new data on productivity are released by the Bureau of Labor Statistics each quarter, there is nothing particularly newsworthy. Because it takes years for changes in productivity trends to manifest themselves, one quarter's data release is not terribly significant.

However, I cannot help but suspect that there are two other very important reasons that the productivity story is not big news in the usual media. One reason is that the productivity trend is positive. The media always prefer economic stories which show America going to hell in a handbasket. In the 1970's, we were supposedly running out of oil. In the 1980's, we were being beaten by Japan. More recently, the media have tried to make the outsourcing phenomenon carry the narrative for the story of gloom and despair.

The other reason that the productivity story is not big news is that the current Administration is unpopular with the media. As much as the media is averse to reporting good news, I think that productivity would receive greater coverage if the big gains were taking place on a Democratic President's watch. The upbeat productivity data would "fit" the story of competent Democratic stewardship of the economy. But it would spoil the narrative of the Bush Administration as bumbling and Hoover-esque to point out that the most fundamental measure of our economic strength is shooting through the roof. It's not that I think that high productivity growth is a partisan story that reflects well on President Bush. But the failure to report on the phenomenon is a partisan story that reflects poorly on the ability of the press to rise above its biases and keep the public informed.


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