The Historic Decline in U.S. Productivity

2022 Was a Very Unproductive Year

Productivity is, or at least should be, the most important factor in American financial well-being. So, it’s a big deal when we suffer dwindling labor productivity. Last year, we saw the second largest annual drop in U.S. labor productivity history. I don’t think the media put a lot of effort into reporting it, but productivity shrank by 1.6%, the largest decline since 1974, when there was a similar plummet of 1.7%.

Is annual productivity going to snap back this year? Maybe. After all, it did back in 1975. But the first quarter of 2023 was not at all heartening, with quarterly productivity shrinking by 2.1%! So, let’s hope for good news when data from the second quarter is published on August 3rd.

What Happens If the Bad News Continues?

If that second quarter news is also bad, we can expect to see a lot of hand-wringing in the U.S., especially on the part of economists and business leaders. The debates about return-to-work and quiet quitting will grow more vociferous, and economists will warn that inflation is going to reemerge if things don’t change. After all, prices go up if it costs more to produce things. In the good times, productivity is what helps keep higher prices at bay.

That’s one reason I think a lot about the subject of productivity. It’s not just another economic metric. It’s a grand indicator of whether or not our whole socioeconomic system is working, both in the physical and the financial sense.

But How About that AI Boost?

Of course, many are now predicting that the new generative AIs will soon result in massive increases in productivity. But that’s not a given. For one thing, it often takes workplaces a long time to figure out how to adequately harness new technologies. This happened with everything from electricity to personal computers.

Maybe it’ll be be different this time around. People like Ray Kurzweil argue that AI will speed up the whole process of change. It’s all a matter of exponential rates of increasing returns.

Others are more dubious. Ezra Klein, for example, points out that the Internet should have resulted in a much larger boost in productivity than it did. But what wasn’t accounted for is that the Internet came with a very large dose of diversion. Suddenly people’s computers became distraction machines, and productivity was diluted as a result.

Klein thinks that this could happen with AI. For example, we may end up in deep conversations with our AI companions even as we fall behind on our work. Or, artificial intelligence will become such a major factor in everything from diverting movies to video games to virtual worlds that we will become more distracted than at any other time in history.

Time will, of course, tell. Personally, I make no predictions, but I can imagine several different scenarios. Maybe those will be a subject for a future post.