Gauging Productivity’s Gains

Whenever adversity strikes our nation, Federal intervention is presumed a desirable response. If the economy stalls or the public suffers some perceived wrong, the bureaucracy reacts, exercising its authority to correct the wrong or protect the public from further harm. Government intervention is expected by the public and is usually welcomed. Presumably, any harmful event can be mitigated by enlightened executive order or legislative act.

In recent years, this instinct has led to a series of legislative and administrative efforts designed to limit stock market losses. Similarly, tax cuts and a range of monetary measures have been implemented to jump-start our stagnant economy. Such government efforts appear to be so well intentioned that scant consideration is given to their limited value or unjustified cost.
Far more powerful and beneficial forces are at work, however, to deal with our economic shortcomings.
In a recent issue of Barron’s Weekly, the basis for this assertion is suggested.

“…during 2001and 2002, productivity growth…averaged nearly 5%, higher than the bubble years of 1998 and 1999 (driven by) fierce efforts of American companies to slash costs and restore profitability….”

Barron’s notes that our productivity improvements have been rising during a period of slow economic growth, a new and promising development. The efficiency of labor has continued rising during a period of slack demand.

Economists recognize that greater efficiency of labor reduces the cost of goods to the consumer, but they never suggest the dollar amount. The new trend in efficiency increases take home pay for American workers and improves profits for the business community, but no one seems willing to hazard an estimate of the total dollar value of these benefits. And analysts would also agree that improved productivity strengthens the economy, but again, no quantitative measure is suggested. Maybe the dollar amounts are deliberately ignored because some of this gain is at the expense of American jobs lost to overseas markets.
I assume, however, that increased efficiency of American labor can be measured, maybe not to the penny but nevertheless, estimated within a few million dollars.

Let’s assume the proficiency of workers in America has improved 5% for the past year. Then the labor cost of the products produced and services performed has gone down by some estimable amount. If productivity of one hundred thirty million workers has improved 5% in one year, then the cost of their output has been reduced by 5% of their paycheck. Suppose each worker was paid on average $ 25,000 annually. That would mean that the labor cost of goods and services through improved productivity went down $325,000,000,000 on an annual basis. That’s some hell of a cost saving! It’s a strong boost to an economy that presumably is having trouble recovering from an economic slowdown.

The service sector is growing every year and its costs are derived from wages and salaries. Insurance, banking, education, medical care and government are all labor-intensive industries, where productivity improvements have lagged until recently. The labor content of the manufacturing sector is a much smaller amount.

The IT revolution is now making its principal inroads in the service sector where cost savings are derived increasingly, from the software industry and the broader use of computers. Nearly every white-collar worker has a computer on his or her desk and is becoming increasingly proficient in its use.

The outstanding success of Wal-Mart, a major contributor to retail services is attributed, in part, to its early acceptance of computer assisted cost savings through adoption of supply chain techniques.

Qualified analysts may someday determine the dollar value of the improvements to our economy derived from the IT revolution. It should be a figure worthy of serious consideration. Maybe improved productivity is as promising as the illusory $12 trillion windfall “discovered” by Michael Boskin, one-time Chairman of the President’s Council of Economic Advisors. My $325,000,000,000 annual figure cost savings to our economy is only meant to suggest an order of magnitude.

Think of the potential for cost savings when our educational system begins to adapt to the savings already available. Technology’s contribution to mass education through satellite broadcasting is in its infancy. The inefficiencies of the FBI discovered in the 9/11 hearings are a reminder of how slow our progress has been in government.

Once upon a time, the world’s advanced economies relied on “economies of scale” to realize greater efficiency. Bigger was better, especially in the extraction industry and the handling of bulk materials. The mining and shipping industries were especially responsive to enlarged equipment for extracting or transporting vast amounts of raw materials. The more powerful the equipment, the less cost per unit to mine or transport the raw materials. In those days, productivity improvements through economies of scale added 1% annually to labor efficiency, far less than we now enjoy.

Productivity gains from this source came to an end about twenty-five years ago. Environmentalists hastened their departure after the highly publicized oil spill in Alaska of the super tanker Valdez. That ill-fated oil carrier was the largest tanker in Esso’s carrier fleet. None of larger size has been built since that date. None ever will.

Today, thanks to computer and technological advances, economic progress has improved so rapidly and with such unexpected force that those who monitor such things have neglected to recognize our speed of improvement. We are now cutting costs in the service sector more rapidly than ever before. The IT revolution is so new and so pervasive that its full contribution to the economy has not yet surfaced in Washington. Much is still to be gained.

Let’s hope that productivity’s advances continue as they have in the recent past, able to offset the costly and largely ineffective programs our government has initiated, to speed our recovery.
A lot of what is happening today may then begin to make sense to you.
For the citizen of modest means, I recommend a Taser stun gun.
Richard E. McConnell