Category Archives: Productivity

Dirty Laundry and High Productivity

Not too long ago, on a visit to Copenhagen, I took several shirts to a laundry. The proprietor greeted me brusquely with the words, “I can’t do express.” He wanted four days to wash and press my shirts, longer than my remaining time in the city.

That evening, on my way to dinner, I walked down the same street and saw the owner still at work, surrounded by piles of clothes. Suddenly, his disinterest in my patronage made sense. Denmark’s economy is strong, unemployment is negligible, and there aren’t many workers willing to accept low-paying, low-productivity jobs in laundries.

I’ve replayed this incident lately as the I’ve heard complaint after complaint about the purported shortage of labor in the U.S. economy. Trucking companies, manufacturers, fast-food restaurants, and retailers all say they can’t hire enough help. The truth, though, is that the supply side of the labor market–prospective employees–responds pretty quickly to economic signals. The reason firms can’t hire enough help is that the compensation they offer is too low. The reason for that, simply enough, is that the way the firms plan to use those workers won’t result in sufficient productivity to justify higher wages.

As an economic matter, it’s good if those low-productivity jobs disappear. On another trip to Denmark, many years ago, a labor union leader told me, “We want to be a wealthy economy, and we can’t be a wealthy economy if we have low-productivity jobs.” It was that union leader’s view that Danish businesses should move low-paying jobs abroad and focus on providing high-wage, high-productivity jobs in Denmark.

You won’t find many union leaders suggesting that in the United States–nor business leaders or politicians. We pay far more attention to the number of jobs in our economy than to the quality of those jobs, and we’re reluctant to let low-productivity jobs vanish. Thus, debate over raising the minimum wage revolves around whether this would cause unemployment among hamburger flippers rather than whether higher labor costs would lead fast-food chains to develop new equipment that would raise productivity. Debate over immigration is colored by the assertion that we need immigrants to come and do low-wage jobs U.S. citizens don’t want, an assertion that allows us to avoid discussing why employers aren’t investing in capital equipment that might render those jobs more attractive and better-paid.

Some companies, of course, see profit in employing low-wage workers and don’t want to change that business model. But if we look deeper, tens of millions of us have selfish reasons for cherishing low-productivity work. While we give lip service to higher productivity, we also want an economy in which it’s cheap and easy to find someone to clean the house, babysit the kids, and mow the lawn. We like going out for an inexpensive dinner and paying a few bucks for an Uber ride across town, treats that would be far less affordable if there were fewer workers who have no better alternatives than taking low-productivity jobs with low pay.

If we want to raise living standards for all Americans, we can’t do it with sluggish productivity growth. That means that we may have to make some sacrifices. That’s how I solved my laundry problem in Copenhagen. I tossed my shirts in the washing machine, let them drip dry, and ironed them myself. Admittedly, my ironing skills were a bit rusty. But if having a high-productivity economy means I’ll need to keep them honed, I suppose I can manage.

Waiting for the Tooth Fairy

Four prominent economists at the Hoover Institution have published a new paper claiming that President Trump’s policies could make the U.S. economy grow 3 percent a year. Perhaps it’s just a coincidence, but three of the four authors have been mentioned as people Trump might nominate to head the Federal Reserve Board after Janet Yellen’s term expires next February.

Let’s be clear: 3 percent annual economic growth would be quite an accomplishment. The U.S. economy hasn’t grown that quickly over a full year since 2005. There’s no doubt that Americans would feel much better off if the economy were to soar as the Hoover Institution economists suggest. Personally, though, I think we’re about as likely to get a visit from the tooth fairy.

The authors attribute slow U.S. economic growth to slow productivity growth and a drop in the percentage of adults who are in the workforce. I agree entirely. But they then go on to lay the blame on President Obama, without mentioning him. “Focused primarily on ‘stimulus’ in the short-term, the conduct of economic policy in the post-crisis years did little to reset expectations higher for long-term growth. That policy failure restrained those expectations, adversely affecting consumption and, especially, investment spending,” they say. The authors assert that lower taxes on businesses and on capital investment, less regulation, and slower growth of federal spending “would help turn the recent upswing in animal spirits into a significant improvement in economic activity.”

You may have caught this movie before. Back in the 1980s, President Reagan’s economic experts promised much the same. Tax rates were lowered, regulations scaled back, federal spending curtailed. Yet on average, output per hour worked in non-farm businesses — the most basic measure of productivity — grew more slowly during the Reagan years than it had during the miserable 1970s, when tax rates had been far higher. These policies were supposed to bring miraculous productivity growth, but as Reagan’s former budget director, David Stockman, said in 1986 “The fundamentals that I look at are not a miracle.” 

What’s the issue here? Our four authors claim that “economic policies are the primary cause of both the productivity slowdown and the poorly performing labor market.” But as I show in An Extraordinary Time, the connection between government policy and productivity growth is tenuous. Productivity gains stem mainly from innovations in the private sector, which work their way into the economy in unforeseen ways. Government can help by supporting education, scientific research, and infrastructure, but the productivity payoff from such investments is unpredictable. The evidence that tax rates or government deficits affect productivity growth is quite weak. This is true not only in the United States, but in other advanced economies as well. 

Some productivity experts, notably Robert Gordon, think slow productivity growth is with us permanently, which would mean Americans’ incomes will grow only modestly in the coming years. I’m not so pessimistic. Historically, we’ve seen unanticipated spurts of productivity growth as firms suddenly figure out how to take advantage of new technologies and new ways of doing business. That has happened before, as with the Internet boomlet of the late 1990s, and I think it’s entirely possible that it could occur again. But I’m afraid the claim that the government can give us faster productivity growth just by passing a couple of laws falls into the realm of wishful thinking.

About Economic Arrogance

The other day Paul Krugman took a whack at the Trump administration’s “economic arrogance.” He was referring to the administration’s repeated claims that its policies can supercharge U.S.  economic growth, taking it as high as 3.5% per year for a decade or more.

The idea that the government can make the economy grow much faster than it does today seems to be an article of faith for many Republicans. During last year’s campaign, more than 300 economists signed an open letter insisting that the economy “could and should be growing 3 to 4 percent.” More recently, Kansas governor Sam Brownback told the Conservative Political Action Conference on February 25, “We’ve got to get the national economy growing above this paltry 1.8%, and I think it’s going to be a key measure for Trump.”

Krugman is right to criticize Trump, and many other Republicans, for insisting that their standard economic nostrums, tax cuts and deregulation, are sure to make the economy grow faster over the long run. There’s plenty of evidence about this; as I point out in my book An Extraordinary Time, the “supply-side” policies of the Reagan Administration, which emphasized lower marginal tax rates and less regulation, failed to rejuvenate U.S. productivity growth and produce an economic miracle. On the contrary, productivity growth during the Reagan years was lower than at any time between World War II and 1977.

So I agree with Krugman that when they promise they can make the economy grow faster over the long term, the Republicans are blowing smoke. But it is only fair to point out, as Krugman does not, that many Democrats have done much the same thing. Since at least the 1970s, many Democrats have insisted that the Federal Reserve could make the economy grow faster if only it would, despite ample evidence that Fed policy has little to do with productivity growth. Economists backing Bernie Sanders’s quest for the Democratic presidential nomination last year insisted that his tax and spending plans could make the economy grow 5.3% a year — an even faster growth rate than Trump claims he can achieve. While Hillary Clinton’s campaign offered no specific claims about the extent to which her economic program would bring faster economic growth, the campaign was happy to point to an analysis by Moody’s contending that the Clinton program would add about three-tenths of a percent to annual economic growth over the next decade.

Suffice it to say that I’m skeptical of such claims from any source. Looking more than a couple of years into the future, the main source of economic growth is higher productivity. And as I point out in An Extraordinary Time, productivity grows unpredictably and erratically, due more to private-sector innovations than to government policy. Economists of all stripes often like to pretend otherwise. Arrogance knows no party.