The Consequences of Declining Productivity
August 30, 2001

Anand, the Consumer Spending czar, was shaken. After a trip to the bookstore (where Sylvia, at Anand's urging, had spent a small fortune on books), they were drinking coffee at the neighborhood café.

“Look,” he said in a distressed voice, pointing to the newspaper, “productivity has slowed down...”

He couldn't go on. Sylvia removed the paper from his trembling fingers and looked at the offending article.

The Department of Commerce had just released the productivity numbers. For the second quarter, it reported, the average American worker's output per hour rose 2.5 percent.

“That isn't so bad,” commented Sylvia. “In the first quarter, it had risen only yy percent. So productivity is on the rebound.”

“But...but...” yammered Anand, “lookit here... see how they have revised the numbers for the past few years...”

He stopped once again, unable to continue. Now concerned, Sylvia read the article more carefully.

Rising productivity was the key to a higher standard of living for the country. If workers were able to produce more output, all sorts of good things would occur in the economy: Gross domestic product would rise, businesses would enjoy bigger profits, workers would reap higher wages, inflation would remain in check. As incomes rose, so would tax revenues–leading to increases in the budget surplus. With inflation muted, Greenspan would become more amenable to lowering interest rates. And bigger profits meant an ascendant stock market as investors, in anticipation of fatter dividends, would become more willing to pay higher prices for shares.

Indeed, all this was in evidence in the second half of the ‘90s. In that period, productivity growth had accelerated as a result of the considerable investments in technology carried out by American businesses. Some analysts, however, becoming inordinately enamored with the lure of the Internet, hailed the advent of a doughty New Economy in which recessions, inflations and other inconveniences would no longer rear their ugly heads. Productivity, in this view, was destined to grow rapidly everafter, ensuring an uninterrupted Morning in America for as long as the eye could see.

This, as we see now, was overly optimistic. Productivity growth has fallen (despite the slightly stronger showing in the second quarter this year). To make matters worse, the Commerce Dept. now said that the productivity in the past few years had been overstated–the striking gains of the past, alas, had turned out to be more modest.

And now, thought Sylvia, with businesses increasingly wary about undertaking new spending on technology investments, it seems unlikely that labor productivity will attain its previous lofty levels any time soon.

“This is not good,” she said, finally.

Anand shook his head despondently.

“The comics,” said Sylvia, trying to counter the gathering gloom. “At least now they are in color.”