Recently I have read what appears to be a stream of articles in this newspaper about the merciless drive for productivity in industry, an effort so intense that it is said to have caused debilitating physical as well as psychological effects on the American work force. At the same, it's been reported that productivity in the non-farm American economy dropped in the final quarter of last year and has been lagging badly.
What? How can this be? No wonder people get exasperated with economists. One of these stories would seem to be wrong.
It is true that, as measured, productive efficiency--that is, output per hour worked--has been poor in the overall economy since the early 1970s. Productivity, or efficiency, in the current business expansion is no better than the dismal performance from 1973 to 1979. At that time, the weakness was attributed, variously, to rising oil prices, excessive taxation, regulation, government interference and the crowding of the labor markets by the young, as yet unproductive, "war babies."
All of these negative forces were thought to be temporary but, as you can see, nothing has changed between then and now, despite weaker oil prices, lower taxes, deregulation and the maturation of the war babies into yuppies.
But there is a big difference between what's going on in the manufacturing sector (whence arise the stories about production-line speedups and managerial bloodletting) and developments in the rest of the economy. American manufacturing efficiency today is about as robust as it was during the twilight of our global economic dominance in the 1960s, and it's much better than in the sickly 1970s.
Pace of Productivity
It's important to note that, when compared to our trading partners, we've done fairly well in manufacturing productivity relative to prior years.
In the 1960s and early 1970s, U.S. manufacturing productivity was rising at about half the collective pace of 11 of our major competitors. In the mid- to late 1970s, it became even worse in relative terms. During the past five years or so, however, we have been running only about 20% behind our major trading partners, and, in the last year or two, U.S. manufacturing productivity growth seems to have pulled even.
Admittedly, these figures exaggerate our relative progress somewhat because the newly industrializedcountries (Korea, Taiwan, Hong Kong, Brazil, etc.) are not taken into account. Even so, there is little doubt that unrelenting pressure from a previously overvalued dollar has forced management in this country to pay more than lip service to costs and efficiency to maintain profitability. Until recently, price increases, the old remedy, have been out of the question. But I wonder if they are very far out of mind.
The news isn't all good, however. If manufacturing productivity is a quantum leap ahead of the level of the 1970s and the business sector overall is as bad as ever, American business efficiency outside manufacturing appears to be in an outright decline. Why?
As you can imagine, beyond the production line where the number of widgets can be counted, there are severe measurement problems in the productivity figures.
Devising a Gauge
How do you measure the productivity of, say, a general office employee? I think we can say with certainty that output in the non-manufacturing sector is being understated and that the efficiency problem is not as serious as it seems. With the onslaught of personal computers, word processors, copy machines that can do everything but fly and high-tech telephones, there's no doubt that we can do more in one hour with all that paraphernalia than we could do in a day without it.
But are we doing it? One cannot help but wonder whether there is something systemically amiss in the American work ethic. It probably is not coincidental that the worst performances in both productivity and inflation show up in the areas that are not especially sensitive to foreign competition, and therefore not materially affected by exchange-rate movements.
Is it possible, then, that the non-manufacturing economy represents the "true" modern work ethic and the manufacturing sector is behaving differently only because it's under the exchange-rate gun? If so, what happens when that gun is removed by a falling dollar?
We know that we must expect a flurry of price increases on imported goods as a result of exchange-rate realignments. Should we also prepare for a round of domestic price increases as competitive pressures ease and manufacturers lapse back into old habits? I recently watched an interview with one of America's mightiest industrial chieftains whose industry has been very much under the gun of import competition. I was not encouraged, to say the least.