The Corner

Behold…

My new Productivity Guy:

Jonah

Years ago I petitioned (unsuccessfully) to become your “brown spirits” guy on the strength of my innovative “Statue of Liberty shot” (recipe: fill shotglass with high octane brown spirits, dip two fingers into glass, put lit match to fingers, hold them in the air and then quickly down the shot; a perfect follow-up to a Marion Barry cocktail). Now that this effort has apparently failed, I would like to try to become your “productivity guy.” My credentials here are arguably more impressive – for example, estimating productivity is something I actually do for a living. Since your column today deals in part with productivity issues, I’ll proceed as if I already have the job and offer a few additional facts that could prove useful down the road.

· When most people talk about productivity (including in your column), they’re talking about labor productivity or output per unit of hour worked. This is a legitimate but limited, and potentially misleading, productivity measure. The more comprehensive productivity measure for the US economy is known as multifactor productivity or MFP, and it includes output per all inputs used in the economy (i.e. labor and capital – the latter, as you say, much harder to measure). This is more relevant than labor productivity because it reflects efficiency gains related to all the inputs used in production and hence the real increase in the economy’s productivity capacity. For example, labor productivity could go up even if output is flat simply because capital is being substituted for labor in production – overall productivity could actually decline in this situation, if the cost of the capital being substituted is greater than that of the labor being replaced (obviously, this wouldn’t have been the intention at the outset but not all investments work out as planned). If overall productivity has declined, that is bad news for the long run productive capacity of the industry or economy in question, even if labor productivity has increased.

· You’re right that the great under-reported story of the Bush administration is the increase in productivity, but the story is even more dramatic when looking at MFP rather than labor productivity. Between 1993 and 2001, the MFP of the US private business sector grew by an average of 1% per annum, which as you say is very respectable by historical standards. But from 2001 through 2005, private business MFP grew by an average of 2.2% per annum, which is one of the best multi-year performances on record – you almost have to go back to the immediate post WWII years for something comparable (when western Europe was obviously in ruins and US industrial supremacy unchallenged).

· The issue of under-reported MFP gains is also a real one and getting worse over time. One of the problems with the “knowledge economy” is not just measuring how inputs are allocated (i.e. labor vs. investment spending for $ spent on R&D) but measuring the actual outputs that such firms provide. How, for example, do you measure the “output” provided by the thousands of consulting firms that continue to spring up, not to mention more traditional examples like legal services, banking, insurance etc? Believe it or not, economists don’t have very good answers for this – since outputs for these sectors are so hard to define, they are sometimes measured using inputs like labor hours. But if outputs = inputs then productivity growth is zero by definition. The people at the BLS who measure MFP are well aware of this and doing their best to address it but it’s just a tough nut to crack – what’s relevant for your column, though, is that this under-counting is obviously getting worse over time, which means the downward bias in reported MFP numbers is also increasing. Bottom line: the productivity record of the Bush administration compared with Clinton etc. is even better than what’s reflected in official statistics.

· Having said this, I think your column today is generally very good, but do have one quibble – I doubt AT&T’s investment in Bell Labs was excluded from GDP in that year. As you say, it probably wasn’t reflected in capital investment spending (in fact, little to no human capital investment is reflected in official statistics) but it was almost certainly reflected in labor spending and hence the national income accounts.

OK, enough for now, but if you ever get the urge to write about productivity in the future and are looking for more information than you ever thought you could use, feel free to shoot me an e-mail.

And I hope your upcoming book tour takes you through Madison – there are other, and in my opinion better, places to unwind and enjoy a Marion Berry cocktail than the Memorial Union where you were taken after your CFact extravaganza.

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