The Good News on Productivity

The stock market is at record highs. Interest rates are down sharply. But the best economic news last week came from the government's number crunchers: productivity rose at a 2% annual rate over the past two years.

Now, "productivity" is hardly a household word. No one ever strikes up a conversation with the stranger sitting next to them at a dinner party by asking, "How is productivity doing these days?" Or how about, "Do you think productivity--the output of goods and services per hour of work--is rising?"

Yet it is productivity that matters - at least when it comes to economic growth and living standards. The more workers can produce an hour the more companies can pay workers without raising prices or slashing profits.

Brad de Long at UC-Berkeley has an unusual measure that captures productivity's long-term impact: The average worker had to sweat some 260 hours to buy a one-speed bicycle in 1895. Today, an average employee can own a one-speed bicycle of higher quality for a little less than a day's work. In 1895, the average workers would labor away for 140 hours to purchase the Encyclopedia Britannica. Today, you can get it for four hours of toil.

Productivity's rise has been far from steady. The seminal economic event of the post World War 11 era was an unexpected drop in productivity growth from the 2.5% range in the 1950s and 1960s to around 1% in the 1970s and 1980s. Economists don't agree on what caused the productivity slowdown - the oil price shock? too many baby boomers flooding the job market?--but there's little doubt that the outcome was slow growth and stagnant incomes.

Productivity seemed to pick up in the 1990s - largely thanks to more than a decade of companies investing record sums in high-tech equipment and reorganizing the way we work. The gains are showing up in low inflation, low unemployment, high corporate profits, and rising pay.

Problem is, the overall productivity statistics registered no change. For good reason, say many economists. High corporate profits and low inflation reflect nothing more than slash-and-burn cost cutting - with labor bearing the brunt of the carnage. We are not working smarter and better, they say÷just meaner.

That's why it is such good news that the statisticians are now saying that productivity did accelerate over the past two years. With companies, stockholders, workers--and the productivity numbers--doing better than before we may well be on a path that allows for faster economic growth and stable prices.

Remember the Oldsmobile Cutlass of the late 1970s. A gas hog. Lots of expensive repairs. Well, the U.S. economy was a little bit like that Oldsmobile back then. Today, we're more like a Toyota Camry - good gas mileage, loaded up with high tech gizmos, and raring to go.


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