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Sunday, October 14, 2007

Is There a Productivity Crisis in Our Future?

Dean Baker and John Schmitt are worried about a productivity slowdown (graph):

The real economic crisis, by John Schmitt and Dean Baker, Comment is Free: All the bad news about the bursting of the US housing bubble ... has deflected the world's attention from what is arguably an even more fundamental problem...: the sharp deceleration in productivity growth since the middle of 2004. ...

For Europeans, long-encouraged to see the United States as the flexible economic ideal, the productivity slowdown sounds another note of caution about the US model. Europeans already know that the US economy generates substantial inequality. The last three years of slow productivity growth now suggest that all that inequality apparently doesn't even guarantee faster growth.

Economists ... agree that the growth rate of productivity is the single most important determinant of the long-run prospects for a country's standard of living.

The deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years... From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%. At this lower rate, average worker output would take about 50 years to double, implying far slower progress in living standards.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply. From the third quarter of 2004, productivity growth rate, at 1.3% per year, has not even managed to match the 1.4% growth rate of the productivity bust of 1973-1995. ...

The productivity numbers are likely even worse than they look. The most important reason is that the official productivity figures don't handle the rapid depreciation of new technology very well. Productivity gauges average output per hour worked - including what workers produce simply to replace obsolete machinery. But, the portion of output that workers produce just to replace worn-out machinery does not actually improve our standard of living. ...

In the earlier postwar period, when machinery depreciated fairly slowly, ignoring this depreciation effect on productivity growth didn't matter much. The driving force behind the 1996-2004 productivity acceleration, however, was massive investment in computers, software and related high-tech machinery, all of which become obsolete much faster than earlier generations of capital goods. (Try running Windows Vista on the computer you bought just a couple of years ago.) Since 1995, however, the depreciation effect is large - almost 0.2 percentage points per year. After we make this adjustment, productivity growth since the middle of 2004 falls from an already disappointing 1.3% per year to a mere 1.1%... Such a severe deceleration in productivity growth constitutes a serious long-term threat to US living standards.

Meanwhile, how has Europe been faring? According to internationally comparable data from the Groningen Growth and Development Centre, between 1995 and 2004, the United States outperformed most of Europe...

Between 2004 and 2006, however, the US lead all but evaporated. The US rate fell to 1.7%, not much different from the rates in Germany (1.7%), France (1.4%), and the United Kingdom (1.4%). If current trends continue, US growth rates may soon be trailing those of Europe (as was the case for almost the entire postwar period before 1995).

Europeans who want their countries to adopt economic policies that are more like those in the United States should consider these data carefully. There is an argument for adopting policies that lead to more inequality and less economic security when the result is more rapid economic growth. There is no obvious argument for more inequality and less security when the result is the same or even slower economic growth.

    Posted by on Sunday, October 14, 2007 at 12:33 PM in Economics, Productivity | Permalink  TrackBack (0)  Comments (39)


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