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We’re Working Harder Than Ever, So Why Is Productivity Plummeting?

Aug 24, 2016

Most of us feel more productive than ever. ­Between wi-fi and mobile data, smartphones and apps that let us do every­thing from hail a ride to order groceries, we can get more done, in more places, more of the time—­whether we want to or not. So why does the Bureau of Labor Statistics (BLS) keep telling us that’s an illusion? Not only is productivity in America declining, but it’s been falling for over a decade. Even during the booming mid-2000s, according to the government’s statisticians, productivity began to flatten and fall. Since economic growth is the product of productivity and demographics, the BLS numbers are a big deal. With birth­rates falling and immigration down, productivity needs to go up—or we’ll soon be worse off economically than our parents.

The slowdown in productivity is now widely seen as one of the big factors in America’s tepid economic recovery. (The U.S. is not alone here: the number of other countries growing by less than 2% a year has been steadily rising over the past few years, as productivity decreases.) Why is productivity down? Theories range from the retirement of highly skilled baby boomers to a lack of productivity-­enhancing investment by private companies to a failure to correctly measure productivity itself.

One of the most provocative reasons has been put forward by Northwestern University’s Robert Gordon in a new book, The Rise and Fall of American Growth. According to Gordon, the digital-­technology boom just isn’t all it’s been cracked up to be—­especially when compared with world-­beating shifts like indoor plumbing, electricity and the combustion engine. Gordon is fast becoming this year’s Thomas Piketty when it comes to both intellectual buzz and sheer book size—like Piketty’s 2013 Capital in the Twenty-First Century, which chronicled income inequality, Gordon’s work is a 700-page-plus doorstop.

But in a nutshell, Gordon argues that the Industrial Revolution at the turn of the 19th century had a much bigger effect on economic growth than the PC revolution in the 20th. He points out that productivity growth actually began shrinking after the 1970s, when digital technology really began to take off. Gordon says the big productivity payoff from digital technology has already come and gone, concentrated mostly from 1996 to 2004. “You’ve got some productivity-­growth effect filtering through from the use of smartphones and tablets, but not nearly as much as from the PC boom,” he says.

Some tech proponents have theorized that productivity is not being counted correctly. They argue that the BLS is still too focused on the production of physical goods, missing some hard-to-count benefits of the digital revolution. But a recent study from the Fed and the IMF debunks this notion somewhat. Even if technology’s benefits are being under­measured, official productivity numbers briefly rose during the early Internet boom and have continued to dip since.

That leaves many wondering about the role of corporate investment in the economy. It’s a well-known fact that many companies have hoarded cash or paid out money to investors in the form of share buybacks and dividends over the past decade, rather than investing in research and development. While under­investment in new technologies that help workers become more productive accounts for only about one-third of the productivity drop, the lack of investment via R&D in the next New New Thing—whatever it may turn out to be—is a more nebulous thing to tally.

What we know for sure is that America’s biggest run-up in productivity happened from 1945 to 1973, when there were major public and private investments in education, infra­structure and worker training. Similar investments, which have been proposed by Democratic presidential candidate Hillary Clinton, could also have the effect (as they did then) of raising wages, which would bolster demand, giving companies more reason to ­invest—­creating a virtuous cycle of productivity growth, wage growth and economic growth.

Certainly, most experts feel that it’s time for politicians, rather than bankers, to take a lead on the productivity issue. As Federal Reserve vice-chair Stanley Fisher said in a speech recently, “monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth. Rather, the key to boosting productivity growth, and the long-run potential of the economy, is more likely to be found in effective fiscal and regulatory policies.” Translation: the next president, and more particularly Congress, need to capitalize on the opportunity that the Federal Reserve has provided by keeping rates so low, for so long. After all bankers, even central bankers, can’t manufacture real growth–only provide the environment in which it might thrive.

There is one bit of good news: nobody is suggesting that productivity isn’t rising because individuals aren’t working hard enough. On the contrary, most economists believe that American blue and white collar workers alike are firing on all cylinders. What we need are new tools and training to make the work that we do count more. That will ultimately require technologies that take us far beyond online taxi ordering, food delivery and the latest gaming app.

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