[lbo-talk] Roach: Real productivity has in the past produced jobs

Michael Pollak mpollak at panix.com
Sun Nov 30 01:02:30 PST 2003


[Money graf:

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



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