Magazine article Newsweek

Productivity's False Facade

Magazine article Newsweek

Productivity's False Facade

Article excerpt

Byline: Robert J. Samuelson

"Importantly, the favorable underlying trends in productivity have continued... [providing] support of household incomes."

--Alan Greenspan, chairman of the Federal Reserve Board, in congressional testimony, Feb. 11, 2003

We go through these fads--these fixations with certain economic statistics, which are imbued with immense significance--and productivity remains one of them. Superficially, the news is reassuring. In 2002 labor productivity bounded ahead by an astounding 4.8 percent, which is the best performance since 1950 (8.5 percent). This suggests that the American economy is fundamentally sound and that, once war uncertainties lift, it will roar ahead. Things are better than they seem. What could be simpler and more soothing?

A lot. Over the long run, better productivity signifies higher living standards through new products, technologies and management methods. But at any one time, productivity depends on prevailing economic conditions--which may not be favorable. The present productivity surge reflects bad news more than good: layoffs and bankruptcies. The ruthless elimination of the least-efficient plants and companies may improve productivity. But it doesn't necessarily signal a robust recovery.

The Darwinian process is apparent everywhere. McDonald's is closing more than 700 of its poorest-performing restaurants. In personal computers, Dell is stealing market share and forcing rivals, like Gateway, to cut back. (In 2002, Dell had 28 percent of U.S. personal computer sales, up from 24 percent in 2001, reports Gartner Dataquest.) American steel companies are undergoing yet another wave of mergers and shutdowns; employment dropped about 15 percent in 2002.

It's tempting to believe that productivity--especially improved technology--will rescue the economy. The grounds for skepticism start with history. In the Great Depression some industries experienced rapid productivity gains, as economic historian Michael A. Bernstein of the University of California, San Diego, has pointed out. Food marketing was one. Small grocery stores gave way to new supermarkets; there were 300 in 1935 and almost 5,000 by 1939. Refrigerator sales boomed--from about 800,000 in 1930 to 2.3 million in 1937. Electrification raised light-bulb sales sharply. But these and other gains couldn't overcome otherwise dismal economic conditions.

We also need to remember that economic statistics are just numbers. Their significance depends on what causes them to move. Productivity--the statistic--is simply a bit of arithmetic. Total output is divided by the hours people work. If output rises faster than work hours, productivity increases. …

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