The New Politics of Productivity Measures

Calvert-Henderson Quality of Life Indicators in Context, originally posted at, 2007

In today’s information age, and the bursting of the IT bubble in 2001, many countries study the USA and are keenly interested in our changing economy and society. This accounts for the worldwide interest in the Calvert-Henderson Quality of Life Indicators, which portray a richer picture of trends in the USA — the rest of the story beyond our economic performance in the late 1990s, seen in soaring GDP-growth, rising stock markets and productivity measures. We are delighted that our Indicators will be published in China and applaud the state council’s work on its “Green GDP” in 2006. A visit by the Confederation of Indian Industry to learn more was welcome in March, 2007. New questions about US government statistics such as those in Business Week‘s February 13, 2006 cover story “Unmasking the Economy” echo many of the issues that we have raised since 2000. The Economist (Feb 18, 2006) notes that US statisticians regularly overstate US economic performance and make revisions downwards, while European statisticians underestimate EU performance and regularly revise upwards! Eurostat figures in January 2007 show EU business climate indicator at an all-time high. The European Union’s ecomony is larger than that of the USA and there are now more euros than dollars in circulation worldwide. Further evidence of US statistical bias is documented in Double Standard by Professor James W. Russell of Connecticut State College.

We show that many of our current “statistical cameras” are pointed at areas where conditions are rapidly restructuring our institutions, whether business, government, academia, or civic society. For example, the composition of GDP has been changing from goods you can drop on your foot to services. Statisticians are reformulating GDP to reflect these new realities. Services now represent the largest sector of our “Information Age” economy. In November 1999, the Bureau of Economic Analysis re-categorized software as investment rather than consumption in the GDP, which revised average annual productivity growth since 1990 from 1.5 percent up to 2 percent. Britain recently followed, recategorizing “in-house” software expenditures as “investment” which catapulted Britain from laggard to the top rank of OECD countries. Japan is expected to follow suit (The Economist, Feb 18, 2006) The debate still rages over measuring productivity per “manhour” (sic) i.e., labor productivity, versus capital productivity, management productivity, and how to factor in the multiple metrics of social and ecological productivity. A broader lens is clearly needed. Meanwhile, global investors seeking better measures of comparison of various countries’ “economic fundamentals” are flying blind.

At the heart of current debates about measuring economic performance are differing methods of measuring productivity. The usual approach measures labor-productivity: output per man (sic) hour or output per person. The idea behind the Industrial Revolution was labor-saving, which meant increasing each worker’s output using machinery and fossil energy. This made sense when natural resources were plentiful. This historical process of augmenting human labor with ever more capital, energy and machinery was the flywheel of technological innovation that powered the Industrial Revolution since its inception in Britain over 300 years ago. Most economic models based on general equilibrium theories missed this dynamic evolutionary process because technology was treated as a given parameter. In its Nov 4, 2004 “Economic Focus,” The Economist agreed with us that labor-productivity is not the best way to measure economic efficiency, and joins us in calling for multi-factor productivity measures.

The erosion of jobs due to technological productivity is finally being acknowledged. This “automation factor,” examined by Louis O. Kelso and Patricia Hetter Kelso in their Two Factor Theory (1967) led to the creation of Employee Stock Ownership Plans (ESOPs), which enable workers to acquire stock in the companies they work for. “If a machine takes your job, you had better own a piece of that machine” has become a watchword for the ESOP movement. Eleven thousand US companies now have ESOPs. For details, visit the website of the National Center for Employee Ownership. In addition, these issues are covered in Episode 10, titled The Transformation of Work, of the TV series Ethical Markets, on PBS or on demand at

Today, beyond labor-productivity are concerns about capital productivity (after the billions of dollars wasted in investments in dubious dot com companies); management productivity (as CEO compensation has soared); natural resources productivity (from unsustainable forest clear-cutting to wasteful mining and extraction methods); and ecological productivity (maintaining biodiversity and ecosystem services). Broader measures like multi-factor or total factor productivity include capital as well as labor — but still ignore ecological productivity. More precise measures of productivity have become vital in comparing the fundamentals of national economic performance. We now see for example, that focusing on measuring labor productivity in corporations means downsizing workforces and fewer new jobs in the short run. The flip side of labor productivity measures is fewer jobs.  For example, in November 2007, productivity increased 6.3% while only 94,000 new jobs were created. Job losses are a continued focus of politics in the USA. Outsourcing, globalization and, to a lesser degree, immigration, are certainly factors, but increasingly the role of technology is being examined as well. As discussed in Displacement Activity (The Economist, July 7, 2005), whether or not immigrants displace domestic workers depends on the relative capital-intensity of the industries in the host economy.

Since the late 1990s, many economists and financial journals frequently editorialized that technological productivity and globalization could continue to deliver low inflation and full employment with budget surpluses and lower interest rates as well. Today, we are debating the bad news about US productivity gains (as measured per worker in the private sector) that the flip side is unemployment. Many companies sought to cut costs and increase efficiency, replacing workers with more efficient or automated process (e.g., replacing supermarket checkers with self-service checkout lines). Yet what is rational and efficient at the company level may not translate into overall efficiency for society. For example, those thrown out of work and into taxpayer supported unemployment benefits and social services have zero or negative productivity. Economic theory has always glossed over this problem by asserting that those formerly employed in less efficient industries would find work in more efficient or new start-up companies. This technological innovation would eventually re-employ redundant workers and the less efficient industries (e.g., textiles) would move offshore to developing countries with plenty of cheap labor. WTO rules removing textile quotas in 2005 led to China’s now dominent position in this industry.

We in the USA have certainly witnessed this part of the economists’ scenario. However, the other part — that entrepreneurs and venture capitalists would continue creating new technologies, and companies would keep investing in new factories — has not kept pace with the need for more jobs. Indeed, new worries are corporations are hoarding their cash and whether past easy credit led to the current credit crunch. Since the recession began in March of 2001, 1.2 million US jobs have disappeared. The Bush Administration’s overall job creation rate has barely kept pace with population growth. Inflation has increased somewhat but remains low due to China’s low price imports.

Even with moderate real interest rates and tax breaks for new investments, too often the new facilities go to China or India. Economists now acknowledge that huge government investments must also be made in education, vocational training and re-training. They rarely acknowledge that the continuous displacement of employees translates into job insecurity, loss of health insurance, mortgage foreclosures, etc, as our Advisory Board member Ron Coleman, editor of Canada’s Reality Check, documented in the June 2004 issue.

The private sector’s need for “labor market flexibility” brings other uncounted social and environmental costs: disrupted communities, greater need for social services to ameliorate personal readjustment, drugs, crime and loss of stable neighborhoods. Environmental cost include boarded up storefronts, strip development, shuttered factories and more sprawl as new facilities avoid blighted areas and seek the lowest tax locations. Even many economists are now acknowledging the new problem of jobless economic growth. This major anomaly in orthodox economic theory is a subject I have commented on in my work (see for example Building a Win-Win World (1996) and Politics of the Solar Age (1981, 1986). The economics profession is being increasingly challenged as being unscientific and even the Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel (often erroneously called a Nobel prize) has been repudiated by Peter Nobel, grandson of Alfred Nobel, as infringing on the Nobel name. Many scientists from other fields are demanding that this Bank of Sweden prize be delinked from the Nobel Awards or abolished. (Dagens Nyheter, Stockhom, Dec 10, 2004 and Le Monde Diplomatique, Feb 2005).

Former US Federal Reserve Chairman Alan Greenspan became a believer in the increased productivity that information technology can deliver. Since the bubble, many analysts have reassessed Greenspan’s performance for not pricking it sooner. Fed Chairman Ben Bernanke has been proved wrong about what he saw as a global savings glut. My interpretation is more in terms of too much money-creation and a global financial bubble, which moves around the planet as the unrealistic expectations of investors seek ever-higher returns – or safety in alternative investments – leading to housing bubbles. The mature companies in manufacturing and traditional sectors of the “Old Economy” have downsized, automated, and realized gains in efficiency and productivity. Many achieved this by merger or acquisition. Others are now reneging on their pension promises and health benefits. Many are being bought by private equity groups or are hoarding cash, buying back their own stock, or returning dividends to their shareholders. A few dot com “stars” such as Ebay, Amazon, and Google, remain to foster hopes in the information tech sector. Venture capital is now moving into alternative energy here in the US and Europe. Returns on capital are robust, but wages to the some 80% of the non-supervisory workforce are flat.

Inflation is still a concern as high oil prices persist around $90 a barrel after the shakeout of speculators. While production continues moving to China, its need for raw materials and oil is soaring, which raises world commodity prices even as global supply chains lower wages. Thus I expect commodity prices to out-perform other markets. China has become the world’s manufacturer, with US companies exporting from Chinese platforms to the world. Japan, now recovering, continues to haunt economic policymakers and central bankers — since low interest rates still do not guarantee that worried investors and consumers will borrow — even at zero interest rates. This is the famous “liquidity trap” described by John Maynard Keynes, who reminded bankers that they could not push on a string. Japan’s economy is reviving. Along with China, both countries are huge buyers of US Treasuries to keep their currencies from appreciating — giving new meaning to the realities of global interdependence.

Today’s debate hinges on appropriate methods for measuring productivity. For example, US productivity measurements flatter the US vis-à-vis Europe, which uses a different metric. When these two methods are conformed, there is little difference between US and European productivity. A new view of Europe “Seeing Europe the Right Way Up” (The Economist, Nov 19, 2005, p75) confirms the reality that, in fact, US and European productivity over the past five years measured as GDP per capita were 1.5% for the US and 1.4% for Europe, while EU employment had actually grown faster. The US economy is burdened by record trade deficits, heavy consumer, corporate debt, and other potential threats. The EU’s unemployment rate is too high and social safety nets are eroding amid sluggish GDP-growth. The dollar is lower vis-à-vis the euro and many other currencies, but is still over-valued according to many analyses. The Europeans’ stalled Constitution will likely not diminish the euro’s new role as an alternative global reserve currency as long as central banks diversify their dollar reserves to include euros. Cross-border euro-nominated transactions have climbed from 27.7% to 31.2% of the world total.

In hindsight, some analysts point to the high US growth rate in the late 1990s as the effect of $10 per barrel oil — the price of which tripled by 2000 and then fell back due to the global economic slowdown. Seventy dollar a barrel oil may continue due to increasing demand from China and uncertainty in the Middle East and Venezuela. High gas prices are still taking their toll of SUV sales — while hybrid sales are up. This trend has continued – leading to Detroit automobile companies troubles. OPEC, reeling from their dollar price losses, is trying to cut production quotas. A wildcard is the possibility that OPEC may retaliate against US policies and the weak dollar by re-denominating its oil in euros. As mentioned earlier, this would cause a further drop in the dollar and increase the price of gasoline in the US to the average world price of $5 per gallon. US average unemployment of 4.7% in 2006 was due to workers dropped from the unemployment count as ‘discouraged’ and no longer looking for work. The US current account deficit is now above 7% of GDP — more than half of which is financed by foreign central banks’ purchases of US securities, rather than private investors.

In the new politics of productivity measures, we see many diametrically opposing views of the same market data and official national statistics. This relates to differing worldviews and assumptions underlying both the statistics and the mindsets of the analysts on whose interpretations we rely. What kinds of mental models, or paradigms, inform their judgments? These paradigms (or different pairs of “spectacles” through which they see the data) are key to understanding why so many brilliant people disagree, even those who spend their careers studying market and social trends in our globalized economy. For example, Northwestern University economist Robert Gordon, using a similar broader systems view to that used by the Calvert-Henderson Indicators, compares standards of living in the USA and the European Union (See Two Centuries of Economic Growth: Europe Chasing the American Frontier

Gordon shows how the US “productivity miracle” in the late 1990s created the misleading impression of a European lag. Since 1990, US productivity has risen by 1.6% per year while the EU’s rose by 1.8%. Since 1950, US productivity averaged 2% while Europe’s rose 3.3%. Gordon then analyzes why although GDP per person-hour is so similar, yet the GDP per person measure is 25% lower in Europe. The difference is due not only to higher unemployment, but to preferences for longer holidays, shorter workweeks and more leisure time. Gordon then calculates other factors that over-state US living standards by omitting the social and environmental costs of our higher crime rate and rising prison populations, urban sprawl due to government subsidies to automobiles and roads, energy waste, higher expenditures on heating and air-conditioning. We at Calvert-Henderson hope more economists adopt similar broader views, which capture “defensive” expenditures (i.e., additional costs consumers and businesses must pay just to mitigate negative effects, like pollution) so as to further clarify such issues.