Many economists say that strong productivity growth goes hand in hand
with a jobless recovery. Nothing could be further from the truth. In
the 1960's, both productivity and employment surged at an annual rate
of close to 3 percent. In the latter half of the 1990's, accelerating
productivity also coincided with rapid job creation.]
[Inference: this is fake productivity, an artifact of bad stats]
[He's gotten another interesting idea at the end about productivity measurement and a temporary surge in the proportion of capital spending to GNP that accompanied a change in "economic operating system" as he puts it.]
November 30, 2003
The Productivity Paradox
By STEPHEN S. ROACH
D espite the economy's stunning 8.2 percent surge in the third
quarter, the staying power of this economic recovery remains a matter
of debate. But there is one aspect of the economy on which agreement
is nearly unanimous: America's miraculous productivity. In the third
quarter, productivity grew by 8.1 percent in the nonfarm business
sector a figure likely to be revised upwards and it has grown at an
average rate of 5.4 percent in the last two years.
This surge is not simply a byproduct of the business cycle, even
accounting for the usual uptick in productivity after a recession. In
the first two years of the six most recent recoveries, productivity
gains averaged only 3.5 percent. The favored explanation is that
improved productivity is yet another benefit of the so-called New
Economy. American business has reinvented itself. Manufacturing and
services companies have figured out how to get more from less. By
using information technologies, they can squeeze ever increasing value
out of the average worker.
It's a great story, and if correct, it could lead to a new and lasting
prosperity in the United States. But it may be wide of the mark.
First of all, productivity measurement is more art than science
especially in America's vast services sector, which employs fully 80
percent of the nation's private work force, according to the United
States Bureau of Labor Statistics. Productivity is calculated as the
ratio of output per unit of work time. How do we measure value added
in the amorphous services sector?
Very poorly, is the answer. The numerator of the productivity
equation, output, is hopelessly vague for services. For many years,
government statisticians have used worker compensation to approximate
output in many service industries, which makes little or no intuitive
sense. The denominator of the productivity equation units of work time
is even more spurious. Government data on work schedules are woefully
out of touch with reality especially in America's largest occupational
group, the professional and managerial segments, which together
account for 35 percent of the total work force.
For example, in financial services, the Labor Department tells us that
the average workweek has been unchanged, at 35.5 hours, since 1988.
That's patently absurd. Courtesy of a profusion of portable
information appliances (laptops, cell phones, personal digital
assistants, etc.), along with near ubiquitous connectivity (hard-wired
and now increasingly wireless), most information workers can toil
around the clock. The official data don't come close to capturing this
cultural shift.
As a result, we are woefully underestimating the time actually spent
on the job. It follows, therefore, that we are equally guilty of
overestimating white-collar productivity. Productivity is not about
working longer. It's about getting more value from each unit of work
time. The official productivity numbers are, in effect, mistaking work
time for leisure time.
This is not a sustainable outcome for the American worker or the
American economy. To the extent productivity miracles are driven more
by perspiration than by inspiration, there are limits to gains in
efficiency based on sheer physical effort.
The same is true for corporate America, where increased productivity
is now showing up on the bottom line in the form of increased profits.
When better earnings stem from cost cutting (and the jobless recovery
that engenders), there are limits to future improvements in
productivity. Strategies that rely primarily on cost cutting will lead
eventually to "hollow" companies businesses that have been stripped
bare of once valuable labor. That's hardly the way to sustained
prosperity.
Many economists say that strong productivity growth goes hand in hand
with a jobless recovery. Nothing could be further from the truth. In
the 1960's, both productivity and employment surged at an annual rate
of close to 3 percent. In the latter half of the 1990's, accelerating
productivity also coincided with rapid job creation.
In fact, there is no precedent for sustained productivity enhancement
through downsizing. That would result in an increasingly barren
economy that will ultimately lose market share in an ever-expanding
world.
That underscores another aspect of America's recent productivity
miracle: the growing use of overseas labor. While this may increase
the profits of American business help-desk employees or
customer-service representatives in India earn a fraction of what
their counterparts in the United States do the American worker does
not directly share the benefits. The result is a clash between the
owners of capital and the providers of labor a clash that has resulted
in heightened trade frictions and growing protectionist risks. There's
nothing sustainable about this plan for productivity enhancement,
either.
In the end, America's productivity revival may be nothing more than a
transition from one way of doing business to another a change in
operating systems, as it were. Aided by the stock market bubble and
the Y2K frenzy, corporate America led the world in spending on new
information technology and telecommunications in the latter half of
the 1990's.
This resulted in an increase of the portion of gross domestic product
that went to capital spending. With the share of capital going up, it
follows that the share of labor went down. Thus national output was
produced with less labor in relative terms resulting in a windfall of
higher productivity. Once the migration from the old technology to the
new starts to peak, this transitional productivity dividend can then
be expected to wane.
No one wants to see that. For all their wishful thinking, believers in
the productivity miracle are right about one critical point:
productivity is the key to prosperity.
Have we finally found the key? It's doubtful. Productivity growth is
sustainable when driven by creativity, risk-taking, innovation and,
yes, new technology. It is fleeting when it is driven simply by
downsizing and longer hours. With cost cutting still the credo and
workers starting to reach physical limits, America's so-called
productivity renaissance may be over before Americans even have a
chance to enjoy it.
Stephen S. Roach is chief economist for Morgan Stanley.
Copyright 2003 The New York Times Company