Download The productivity problem that pols ignore

Right Turn | Opinion
The productivity problem
that pols ignore
By Jennifer Rubin August 10
The 2016 presidential race, to put it mildly, will not go down as a campaign distinguished by cogent economic arguments and
serious discussions of policy options. That said, it is shocking that a major — maybe the major — economic issue has not
been seriously addressed by either candidate, has not been raised in debates or has been barely mentioned in the press until
quite recently.
The Wall Street Journal reports:
The longest slide in worker productivity since the late 1970s is haunting the U.S. economy’s long­term
prospects, a force that could prompt Federal Reserve officials to keep interest rates low for years to
come.
Nonfarm business productivity—the goods and services produced each hour by American workers—
decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased
faster than output, the Labor Department said Tuesday.
That’s a serious barrier to economic expansion, employment and wage growth. (“Over time, persistently weak productivity
would weigh on American living standards by restraining the economy’s ability to grow quickly and generate higher incomes
without stoking too much inflation. Already, some economists say slow productivity may be restraining wage
growth. Stagnant productivity and rising labor costs also could squeeze corporate profits, which have been under pressure
from the energy sector’s downturn and other forces.”) Productivity increases, even in tiny amounts, yield huge benefits.
(“Consider the difference between U.S. GDP growth of 2% or 3% over a decade. The latter, which assumes 1% faster
productivity growth, would result in an economy $2 trillion larger — roughly the size of Italy’s economy”).
Declining productivity is a serious concern, as American Action Forum’s Doug Holtz­Eakin explains:
Suppose I’m making 100 widgets (economics examples are always widgets; I don’t know why) and can sell
them at $10 a piece. That gives me revenue of $1,000. To make things concrete, let’s assume I employ 10
people and pay them $80 each. Notice that the total wage bill is $800 and average productivity is 10
widgets per worker.
The first impact of productivity is on inflation pressures and Fed decision­making. In my example,
suppose productivity falls to 9 widgets per worker – for a total of only 90 widgets. The only way I can
keep my revenue at $1,000 is to raise the price from $10.00 to $11.11.
keep my revenue at $1,000 is to raise the price from $10.00 to $11.11.
The second impact is on labor costs and profitability. Notice that as a result of the productivity decline,
the labor cost per widget has risen from $8.00 to $8.89. Since labor is already more costly, it is tougher
to imagine providing raises. This is especially true because – in the absence of a price increase – profits
overall have declined from $200 to $100 and profit per widget is down from $2.00 to $1.11. I’ll be
hearing from my shareholders.
The two big questions about the productivity decline are: 1. Is it real? and 2. If so, how do we fix it?
Some economists posit that with the shift to a more service­based economy we simply don’t have good measures of
productivity. Chad Syverson’s study, for example, argues: “Under this line of reasoning, which I term the mismeasurement
hypothesis, true productivity growth has not slowed (or slowed considerably less than measured) since 2004, but recent
gains have not been reflected in productivity statistics, either because new goods’ total surplus has shifted from (measured)
revenues to (unmeasured) consumer surplus, or because price indices are overstated.”
If we recognize productivity is an issue (even if not as acute as some claim), then what’s the cause and the solution? Some
argue we’ve run out of big, transformative technological breakthroughs. Others claim that there are no more big
improvements in government. (The theory goes that “good government … was responsible for a significant amount of the
growth in developed nations between 1870 and 1970. That kind of improvement was probably a one­off. Unlike science and
technology, government probably has an upper limit of effectiveness. You can only transition from being North Korea to
South Korea once. That means that some of the productivity slowdown we have observed may be due to our success in
improving how we govern ourselves.”)
Some analysts think government is not doing enough. Noah Smith argues, “Whether that means better infrastructure,
education reforms, more research funding, government­sponsored angel investing or other policies, it’s worth giving
government a shot at the productivity predicament.”
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By contrast, many conservatives say it is our own hyperactive policy choices that stifle innovation and investment (e.g. a tax
code that distorts economic decisions, unwise regulation). John Cochrane makes the case that the government is stifling
productivity:
Most of all, the country needs a dramatic legal and regulatory simplification, restoring the rule of law.
Middle­aged America is living in a hoarder’s house of a legal system. State and local impediments such as
occupational licensing and zoning are also part of the problem.
Growth­oriented policies will be resisted. Growth comes from productivity, which comes from new
technologies and new companies. These displace the profits of old companies, and the healthy pay and
settled lives of their managers and workers. Economic regulation is largely designed to protect profits,
jobs and wages tied to old ways of doing things. Everyone likes growth, but only in someone else’s
backyard.
backyard.
And still others make the argument that persistently low interest rates are sapping productivity. (“Rock­bottom rates made
it easier for highly indebted — and poorly performing — companies to remain on life support. Productivity should rise as
these zombie firms are weeded out. And higher rates will make it less appealing for companies to issue debt and buy back
shares, making [capital investment] relatively more attractive.”)
If you are looking for a definitive answer, you’ll be disappointed. But unfortunately, politicians aren’t even asking the right
questions. Maybe we should start asking politicians what they think the productivity problem is and what they think the
solution is. (Chances are, after a baffled reaction, they will frantically turn to an aide for some talking point.)
Right now much of what is being suggested — trade barriers, barring young, skilled workers, increasing regulations,
subsidizing industries regardless of performance — is inimical to increasing productivity. It does not make for better
workers, higher output, bigger profits and more investment. These proposals will make us poorer, lowering wages and
profits and in turn sapping more investment. Do pols know this? Do they care? Getting them to focus on this basic economic
issue might be a good place to start — rather than vague promises of “More jobs!” and a hodgepodge of counterproductive
policies.
Jennifer Rubin writes the Right Turn blog for The Post, offering reported opinion from a conservative
perspective.  Follow @JRubinBlogger
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