Productivity Will Suffer
What seem to be tiny productivity shifts have huge consequences.
As anyone who’s taken basic college economics should know, productivity is simply jargon for efficiency. It’s also what most people think of as economic progress. The good news is that productivity has been growing strongly; the bad news is that it may slow down. To see why that matters, consult a fascinating government report, “100 Years of U.S. Consumer Spending.” A century ago, Americans spent 43% of their incomes on food and another 14% on clothing. By 2002, those shares were 13% and 4%. Meanwhile, family incomes (after inflation) had tripled. Filling the spending gap are all the things we take for granted–cars, TVs, travel, telephones, the Internet.
This triumph of mass consumption is usually credited to technological breakthroughs, from the assembly line to computer chips. But the whole process is also described as productivity improvement. Whatever enables people to produce more in a given time (machinery, skills, organization) boosts productivity. That in turn raises our incomes–or gives us more leisure. It also promotes domestic tranquillity by muffling the competition between government and personal spending. In Moody’s Economy.com’s outlook, productivity growth averages 1.4 percent a year from 2005 to 2035. The main reason: stunted business investment in new machinery, technologies and buildings, says chief economist Mark Zandi.
“We don’t save much as a nation, and we’ve gotten away with it so far because overseas investors have been willing to finance our investment,” he says. But he doubts that will continue. As global investors shift to other markets, big federal budget deficits will compete increasingly with private companies for credit. Higher interest rates will crowd out some business investment. Productivity will suffer.
