High Productivity Is Fine, but It’s Just Not Enough

Everett Ehrlich, an undersecretary of Commerce in the Clinton administration, is director of research of the Committee for Economic Development, a nonpartisan economic policy think tank.

Nothing so unites a gaggle of economists as their reverence for productivity growth. Higher productivity allows us to make more, earn more and consume more; it is the stuff of which our standard of living is made.

But productivity -- the ratio of what we produce to the amount of work we did to produce it -- grew at such a rapid rate in the third quarter of the year that it gave some observers vertigo. If it were sustained all year, annual growth would be 9.2%, and if it continued at that rate in perpetuity, we could double our output -- and our incomes, assuming it all got sold -- every eight years or so.

To optimists, this news was the robin that heralds spring. To the pessimists, it foretold a rain of pink slips as firms eight years from now make the same stuff they always have but with a smaller labor force.

So which is it? Are we really about to produce ourselves into oblivion? No.


First, productivity is not going to grow at a steady rate of 9%. Productivity usually grows fastest during the opening spurts of a recovery, when firms are surprised by new orders and race to fill them with the staff and equipment on hand. Moreover, a healthy share of the new output comes from service industries that can produce more in a short time without any need to hire new workers -- think of the phone system, or an empty airplane or movie theater.

Still, 9% productivity growth, even if only for a few months, is nothing to shake a stick at. What, then, is the problem?

The problem is that productivity growth does not automatically turn itself into economic growth. Productivity tells us our potential to grow, but not the actual result. Consider an economy spilling out 9% more “stuff” -- haircuts, computers, insurance, fast food, all of it -- every year without any need for new hires. Who will consume the fruits of this abundance? Incomes would need to rise by a like amount (or prices fall like a son of a gun) in order to snarf this stuff up.

In the world of economic theory, that’s not a problem. A more productive worker generates more profits for her firm, and a more profitable firm responds to this signal by making more of whatever is profitable to make. But in the real world, this process requires time and confidence, as only confidence can lead a business to believe in the permanence of the profitable opportunities it faces.


This, then, is the challenge posed by productivity growth. It is great news, but it is also a formidable challenge, a bar the economy must jump. If the productivity growth rate is 9% -- or, more realistically for the long term, probably about 3% -- then the economy must grow by the same 3% that productivity does or it will lose jobs and therefore purchasing power.

The good news is that an “underconsumption crisis” is not in the works. Historically, every major economic expansion has had a “breakout” quarter such as this one. Once productivity fades from a hypersonic to a merely robust rate, and as demand continues to grow, the economy will move from a “recovery” to an “expansion.”

But there is little prospect of coaxing it further. The traditional economic stimulants have already been tried; the economy is already heavily tax-stimulated and money is already dirt-cheap. So although a ticklish period of “jobless growth” probably still awaits us, it is likely to be a short one.

Still, two issues remain. The first is: What happens next? If the economy does grow substantially in the year ahead, business demands for funds may start to compete with burgeoning federal borrowing, and the low interest rates that have helped propel the economy may start to unravel. Or the Asian lenders who are financing our deficits by soaking up Treasury bills may think twice about doing so, with the same result.

And the second issue is the human one. If productivity is surging, then some jobs will be harder to find -- read manufacturing.

We are told to think of the jobless as indolent, or unlucky in some self-fulfilling way. In fact, they are the victims of our country’s economic fecundity. The story of productivity is that economic growth and change are irrevocably intertwined. We need an economic policy that promotes adjustment in order to make productivity the productive force it is supposed to be.