The conventional wisdom about productivity is finally going out the window – and I say good riddance, baby.
Sure, it’s still widely reported that living standards are inextricably linked to productivity. For example, the Economic Policy Institute notes, “The level of productivity is the single most important determinant of a country’s standard of living, with faster productivity growth leading to an increasingly better standard of living.”
That’s not too different from what the Concise Encyclopedia of Economics states: “The growth of productivity—output per unit of input—is the fundamental determinant of the growth of a country’s material standard of living.”
Which, in turn, is not too different from what the World Bank has to say: “Productivity growth is probably the single most important indicator of a country’s economic progress.”
Just one little problem, of course. The data indicates it’s not true, at least not in the ways it has usually been explained.
Exhibit A: United States of America
In the U.S., productivity has been going up for many years. In fact, it’s been rising considerably faster since the year 2000 than it had for the previous three decades. Have a look at this data from the Bureau of Labor Statistics:
Productivity Change in the Nonfarm Business Sector, 1947-2010
“Standard of living” is trickier to measure because nobody quite knows how to measure it (which is kind of weird, considering how much economists like the term). But, let’s just assume it’s strongly related to income, something we can actually measure. Now, what does U.S. men’s median income look like since 1973 (I picked men’s because they’ve been in the workforce more consistently since the early 1970s)? Well, have a look at data from the U.S. Census Bureau:
Let’s face it: that is one ugly line, with male income earners actually losing a little ground since 1973. So what happened to their productivity paycheck?
The short answer is that the folks along the median just didn’t make it into the “national incentive plan.”
This is clear when you look at the work by people such as Erik Brynjolfsson and Andrew McAfee of MIT. In their recent book called Race Against the Machine, they commented on a graph that showed the amazing and growing disparity between real median household income and real GDP per capita since 1975.
They called it “striking” and, when I looked it over, I just gave a Homer Simpson-like, “Doh.” Because at one point in my life I was actually mystified about where the U.S. productivity paycheck had gone. I took it on faith that productivity was creating wealth, but where was it?
I even made it a point to ask this question of economists when I met them. Sometimes I got convoluted answers about how today’s products (from light bulbs to medical devices) are of a higher quality than those of yesteryear and so equate with greater wealth and higher living standards. Sometimes I got snide remarks about government productivity data. Sometimes I just got something along the lines of, “Hey, good question.” It stumped me. It was if I’d asked my plumber – or maybe my local hydrologist – where the water goes and he just shrugged his shoulders.
But Erik Brynjolfsson and Andrew McAfee made this observation:
There have been trillions of dollars of wealth created in recent decades, but most of it went to a relatively small share of the population. In fact, economist Ed Wolff found that over 100% of all the wealth increase in America between 1983 and 2009 accrued to the top 20% of households. The other four-fifths of the population saw a net decrease in wealth over nearly 30 years.
Ouch. So, yes, the productivity paychecks are real. And they do raise the standard of living – but not for everybody. Or even most people.
Ok, so before you peg me as some would-be socialist 99-percent rabble-rouser (not that there’s anything wrong with that), let me say that social inequities are beside the point, from my perspective. I just wanted to know where the water/money was going. If it was going to the top quintile (nothing wrong with those folks, either), so be it. At least it existed somewhere.
But it does raise another question: “Did those folks earn that paycheck, or steal it?”
If that’s incendiary phrasing, don’t blame me – or even some sly socialists slithering in the shadows. Blame the purveyors of conventional wisdom mentioned above. The implication has always been that we all benefit from productivity increases, but, in practice, as Brynjolfsson and McAfee say, “There is no economic law that says that everyone, or even most people, automatically benefit from technological progress.”
And, this just makes sense. Let’s say a bank restructures and lets go of a couple of bank tellers for every automatic teller machine it adds. Do the other tellers divvy up the salary of the people who were laid off minus the cost of the machines? Not hardly. They’re just grateful to hang onto their jobs. No, the organization as a whole gets the savings (which may help explain today’s historically high corporate profits). With any luck, some of those savings go into creating new jobs.
What kind of jobs? Not teller jobs, probably. No, the money is spent on bonuses for the people who made the restructuring decisions or on the hiring of higher-level employees who (at least in theory) bring in more revenue than they’re paid. Multiply this dynamic many times over the course of decades, and median incomes stay flat while GDP per person (which is an average rather than a median) goes up.
So, to answer our question, “They earned it, kind of, sort of, in a way.” The mistake we made was in thinking that the productivity paycheck was going to be divvied up among us. It wasn’t.
Maybe you think that’s not fair.
Well, tough noogies. Free markets aren’t fair. They are, at best, somewhat logical (and maybe not even that).
But at least we now have a clue about where the water goes. That is the beginning of wisdom – and a fine antidote to fiscal fairy tales.