US productivity slipping: an economic whodunit

Edward F. Denison, a Department of Commerce economist, put Washington in something of a quandary last year: In an article for his department's Survey of Current Business and a book for the Brookings Institution, he found no explanation for around half of the decline in productivity in the nation in the 1970s.

The productivity expert did find numerous sources for the explainable half, however.

President Carter and Congress were left asking themselves: What in the world are we supposed to do to step up national productivity if economists can't tell us much about why it declined in the first place?"

Improved productivity is, of course, important, because it provides the means for an improved standard of living. If output per man-hour does not rise, politicians and interest groups face a hassle over dividing up a static economic pie rather than a growing pie. It makes a great difference in the civility of national politics.

Well, from 1950 to 1965, the average annual growth of output per hour for nonfarm business was 2.5 percent per year. From 1965 to 1978, productivity grew only 1.5 percent per year. That's a decline of one percentage point in the growth rate.

Further, productivity in the nonfarm business sector actually declined 1.5 percent in the first quarter of this year. That kind of news sets off alarm bells in Washington. At this moment, Congress seems more inclined to pass some variety of a "supply side" tax cut to stimulate modernization of plant and equipment, as well as the usual trim in personal income tax rates.

The grim productivity picture also prompted the Federal Reserve Bank of Boston to hold a conference last week in Edgartown, Martha's Vineyard, to try to pin down somewhat better the causes and cures of the problem.

At least two economists figured they have traced further the sources of decline in productivity.

For instance, John W. Kendrick, a economics professor at George Washington University, using the same basic analytical technique as Mr. Denison, managed to explain much more of productivity growth (or lack thereof). He figured that the declerating growth of capital relative to labor after 1966, and particularly after 1973, was an important factor. In other words, the nation was not harnessing machines to help workers produce goods as well as it had been.

Another, even more important, factor, he said, was the drop in research-and-development expenditures. The result was less innovation to produce more with less labor input.

A third element has been the reduction in available resources. Crude oil is more expensive and harder to find. Farmers are using less-productive land. Other minerals are more expensive to mine; and so on.

Fourth, the nation's industries and workers have been working at less than capacity and thus not so efficiently.

Fifth, government regulation has been costly in money and time. Though it may produce a cleaner environment and safer workplace, regulation does not result in more measurable goods and services.

And there are other factors harming productivity.

Richard W. Kopcke, an economist with the Federal Reserve Bank of Boston, using a different analytical technique, concluded that about half of the slump in productivity results from a slower rate of capital accumulation -- that is, business has been spending less on the modern plant and equipment that produces more goods and services with relatively les labor.

The prime reason for this decline in capital accumulation, he explains, heas been the rising rate of inflation since the late 1960s. Inflation has raised business income tax burdens, thereby depressing the demand for capital. It is not so financially rewarding to sink money into new plant and equipment when the government takes a bigger chunk of any profits.

If Mr. Kopcke is correct, then Washington is on the right track when it considers boosting depreciation allowances for business, providing better investment tax credits, or otherwise trimming corporate taxes.

Another analyst, William D. Nordhaus, a Yale University economics professor, looked at the research into the productivity decline and came up with a "best guess" of the sources, which left only about one-third a mystery. Of the 2.5 percent decline in productivity, he explained 0.3 percent by cyclical factors; 0 .5 percent by the decline in capital accumulation; 0.1 percent by poorer labor input; 0.2 percent due to more costly energy; 0.2 percent because of sterner regulation; 0.1 percent from less research and development; and 0.3 percent by shifts from one sector of the economy to a less efficient sector (say from manufacturing to services). That left 0.8 percent unexplained.

What this sort of research does is shoot down some productivity stereotypes. It says that OPEC's price increases aren't the main cause of the productivity decline. It also indicates that labor is to no major degree lazier or more inefficient than it was.

It also shows, however, that improving productivity will not be a simple, one-solution technique. Encouraging capital formation should help considerably. But Congress will also need to look at research and development, regulation, energy, and the other factors cited by the economists for ways to boost output per man-hour.