The Productivity Pinch

Productivity underpins our economic strength, and our economic strength is now being eroded and questioned. The productivity slump is an American climacteric.

--C. Jackson Grayson Jr., chairman of the American Productivity Center

Like a man in his prime, American productivity had looked so robust, so deceptively healthy. From the end of World War II through the 1960s, it increased comfortably at an annual average of just over 3%. The first symptom of trouble struck in the 1970s, when gains started averaging half of that. They tumbled to 1.6% in 1977 and .4% in 1978. Now that most important measure of an economy's efficiency is showing the most alarming decline. Output per hour worked in private business dropped at an annual rate of 2.8% in this year's first quarter and 3.8% in the second quarter. Only the U.S.'s highly efficient farms stopped a much more dismal performance; not counting them, private productivity from April to June dropped at a 5.7% rate, the worst plunge since statistics keeping started more than three decades ago.

Despite the drop, the U.S. remains first in the international productivity league, but its lead is narrowing. Over the past ten years, nonfarm private productivity increased only 27%--the same as in Britain, but less than half as much as in France, West Germany and Italy and less than a quarter as much as in Japan. In 1950 it took seven Japanese or three German workers to match the industrial output of one American; today two Japanese and about 1.3 Germans do as well. Says Economist Arthur Laffer: "The U.S. is the fastest 'undeveloping' country in the world."

Nobody knows the deeper reasons why productivity is declining, let alone so rapidly. The question of whether people on the job are working as hard as before has been the subject of countless barroom arguments and almost no serious study. There is better evidence of other causes:

EXCESSIVE REGULATION Government rules have forced companies to spend cash on costly environmental, health and safety equipment rather than on modern machines. Earlier this year, the congressional Joint Economic Committee deplored the fact that U.S. industry in 1977 had to spend $6.9 billion for pollution-control equipment "that does not contribute directly to the production of measured output."

INADEQUATE INVESTMENT In the 25 years up to 1973, business spending on new plants added about 3% a year to the nation's capital base--plants and machines--but since then the total has risen only some 1.75% a year. Businessmen blame the drop on regulation, profit squeeze, high taxes on capital, and inflation, which saps the confidence that is necessary for investment.

REDUCED R. AND D. Spending on research and development has dropped from about 3% of G.N.P. in 1964 to 2% last year. One reason: managers have concluded that inflation makes the payoff too long-term and too uncertain. One result: the number of U.S. patents issued to Americans has fallen 25% since 1971, while the number issued to foreigners has risen 14%.

SURGE OF SERVICES They now account for 46% of G.N.P., up from 31% in 1950. It is harder to increase the productivity of a doctor, policeman, barber or bureaucrat than an assembly-line worker.

"SUNSET" PROTECTION Import barriers support such ailing industries as steel and textiles. Some troubled firms, like Chrysler, are propped by federal bailouts. The hidden price is a perpetuation of inefficiency. "You subsidize old, low-productivity industries, while we give aid to new, high-productivity industries," notes Joji Arai, manager of the U.S. office of the Japan Productivity Center. He is, in effect, a legal "spy" whose job is to pass good U.S. ideas back to Japanese companies.

Other, more immediate problems are accelerating the decline in productivity. Output per hour worked usually drops in the early stages of recession. That is because new orders fall faster than employers lay off workers--and so roughly the same force puts out fewer goods. Higher energy costs also raise the cost of using even efficient equipment and, perhaps, move some companies to switch away from fuel-thirsty machines to more labor-intensive production.

One major step to a solution is the spreading awareness that productivity is indeed a problem. "More companies are starting productivity programs," says Grayson, "even though they have not reported any major breakthroughs yet. What impresses me is the totality of the approaches. They are looking beyond industrial engineering to incentive schemes, employee involvement and new systems for management to gather information."

The first step--now being undertaken by companies as diverse as Phillips Petroleum, Lear Siegler, Boise Cascade and Bank of America--is to find ways to measure a firm's productivity. The next step is to improve it by means of frequent meetings between management and labor and by what Grayson calls the three Rs of productivity: recognition, responsibility and rewards for workers. Under pressure from the White House, some of the regulatory agencies are searching for ways to reduce the burden of Government rules on business and to measure the impact against the expected benefits. The idea that companies should be allowed to find their own, most efficient ways of achieving regulatory goals is gaining favor.

Tax reform to spur investment would help productivity by stimulating capital formation. So would any move to give some extra tax benefits for R. and D. spending, possibly by emulating Canada's 150% tax write-off for such expenditures. Since Big Government has caused so many of the problems of productivity, it is only fair that Government contribute to the solutions.

This file is automatically generated by a robot program, so viewer discretion is required.