Finding a Better Way to Rate Productivity
OK, so maybe America is rapidly deindustrializing. And, yes, it’s true that our rate of productivity growth fell a spectacular 65% from 1950 to 1973 and has risen more slowly than virtually all of our industrial rivals since then. (In a 16-nation productivity growth rate survey, the United States ranked an abysmal 15th.)
But, hey, don’t worry--be happy! We’re not doing that badly after all.
“It isn’t just U.S. productivity growth that has shrunk,” observes Princeton and New York University economist William Baumol. “It’s everybody else’s too.”
Baumol is one of the dismal science’s keenest observers of the quantitative trends and economic statistics that measure a nation’s productivity. As a rule, the greater a nation’s rate of productivity growth, the greater the standard of living its citizens enjoy.
At a recent Sloan Foundation conference on research on industry and economic growth, Baumol infuriated the competitiveness crowd with his arguments that the United States is not being economically humiliated by Japan and Europe. In fact, he asserts, America is more than holding its own.
America de-industrializing? Baumol’s statistics say the Europeans are shifting into services even more rapidly than we are, and the Japanese aren’t too far behind. Look carefully at the global productivity numbers, Baumol insists, and the bad news about America’s productivity decline doesn’t look quite so bad.
“Our fall in growth rate is comparable to other countries,” he observes. “During the time our productivity growth rate fell 65%, the Japanese growth rate fell 66%.”
What’s more, there has been a gradual global narrowing of the differential in labor productivity between nations. Indeed, Baumol says, “Japan has reached the same manufacturing productivity growth rate as the U.S.”
Baumol’s interpretation is that the world’s post-World War II productivity boom was an aberration. What we’ve been seeing the last 25 years isn’t the gradual erosion of the U.S. economy, but rather, he says, a “return to historical productivity growth rates.”
In other words, the global economy seems to be moving toward a grand convergence: An environment where national productivity growth rates are virtually identical with one another. Japanese productivity growth will be roughly the same as the new European Community’s, which will be the same as America’s.
To be sure, some industrial sectors of this new economic world order will be dominated by one national entity or the other.
“The convergence (of productivity growth rates) on the aggregate level is the result of specialization by countries in various industries--autos for Japan and food products and airplanes for the U.S., for example,” Baumol says.
“The moral of these analyses,” Baumol asserts, “is that we don’t have to act in panic. We’re still sufficiently ahead so that we can think before we act.”
Baumol’s moral might be a little too sanguine. Aggregate national productivity statistics can conceal as much as they reveal. Just because someone is a paraplegic doesn’t mean they can’t make an excellent living as a lawyer or software designer.
But does the United States want to have an economy that resembles a brilliantly productive paraplegic?
As American industries restructure in their relentless quest for leanness, meanness and productivity, Baumol notes that virtually all the wealth that has been created has flowed to the upper 20% of American society. By contrast, Japan’s productivity growth--and Europe’s--have yielded more equitable income distributions.
What is the trade-off between equity and efficiency in the emerging new world order of productivity convergence? Will America’s economy becoming locked into structures that institutionalize huge income gaps and restrict economic mobility?
Does America get “locked out” of industries--such as automobiles, consumer electronics and commodity semiconductors--where such specialization is absent and where there is high added value? Does it make sense to craft policy around macro-measures of productivity growth where sector-specific measures might be more appropriate?
“Nothing I say should cause us as a nation to relax,” Baumol told his audience. But does anyone doubt that his analyses can be--and will be--used by the anti-industrial policy crowd as “proof” that America as a nation remains appropriately competitive?
What’s really important about Baumol’s work, however, is that it challenges us to decide whether our “national aggregate” statistics are the right ones to use when we come to grips with economic issues such as productivity and innovation. As Baumol himself notes, no one knows what happens if national productivity growth rates converge. Does the world’s economy simply grow in harmonious equilibrium? Or will other forces emerge that prompt a new divergence where some nations pull ahead and other’s lapse into a spiral of decay?
You won’t find those answers in any economic analyses yet. But those are precisely the questions we have to deal with as both a nation and as a collection of regional economies and industries--if we really care about quality-of-life issues.
