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Productivity Growth: The Numbers and the Reality

September 11, 2012 5 minute Read by Ike Brannon

It’s no secret that most statistics emanating from China these days are not to be taken at face value. While the country’s government invariably reports a strong GDP number each and every quarter, other statistics closely correlated with GDP that are not prone to manipulation (such as energy production and trade data) suggest that Chinese economic growth varies quite a bit more than the official statistics let on. These figures also show that economic growth came close to zero during the Asian financial crisis in the late 1990s as well as in the wake of the 2008 financial crisis. While such statistical perfidy may be expected from communists, U.S. data are above reproach, right? Guess again. While no one’s claiming that our statistical agencies are fudging the numbers, the way our government collects data leaves us with a few blind spots, especially when it comes to measuring worker productivity. For those readers who don’t obsess over macroeconomic data, worker productivity captures how much output we get from a given hour of work from the typical employee. Ultimately, this is the key driver of economic well-being: If we want our populace to be able to consume more goods and services, then we need more people to work, those who are working to work more hours, or workers to be more productive when they are at work. Since the first two have natural limits, the only long-term way to sustain improvements in our standard of living is to increase productivity. The official statistics indicate that this has, in fact, been occurring over the past twenty years. Productivity growth fell roughly 50% in the early seventies, to a little over 1% from approximately 2.5%. Falling productivity in these years was driven by the energy crisis (companies spent R&D dollars economizing on energy rather than labor) as well as a ballooning of the labor force as the baby boom generation reached working age and women entered the work force in large numbers. Twenty years later, productivity growth returned to 2.5%, mainly (economists hypothesize) because of the fruits of the IT revolution and the resulting gains achieved in the retail sector of the economy. However, not everyone is comfortable with this story.  Michael Mandel, an economist at the Progressive Policy Institute and a former columnist at Businessweek, argues convincingly in an article in Washington Monthly that the strong productivity numbers in the last decade were merely an artifact of the increasingly global span of today’s supply chains. Put simply, a manufacturer can do two things to reduce costs: He can make his domestic workers more productive or he can use less expensive foreign suppliers. Mandel reasons that whether a company saves $1 million by making a warehouse more efficient or by switching from a Japanese to a Chinese supplier, it’s largely irrelevant for our productivity numbers because the BLS finds it difficult to track price drops from such a change. In other words, it cannot distinguish between the two effects, even though (Mandel argues) the real cause matters quite a bit. Mandel suggests that as much as half of the productivity gains in non-high-tech industries over the past decade may in fact be illusory, an artifact of this “import price bias.” And gains in this sector have been a key driver in our economy-wide productivity growth. If Mandel is right it means that we cannot count on any “resumption” of productivity growth to get our economy back to the good old days of 3% growth. Instead, we have to think about ways to generate new sources of productivity growth to get our long-term economy growing. It’s not impossible: Rob Atkinson, author of the recently released Innovation Economics, argues that the economic history of the U.S. is a story of the rise and fall of different sectors of the economy. While the gains in the 1990s were largely driven by IT gains in the retail sector, the next rise in productivity growth may result from the application of IT gains elsewhere in the economy. Regardless, it behooves us to divine the true source of our recent productivity gains if we want to come up with an accurate prescription for what ails the U.S. economy — besides too much debt and a convoluted tax code, of course.


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Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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