The Economy Goes From Bad to Worse

By Dean Baker, TruthOut.org. Posted August 9, 2007.

For most of this decade, progressive economists have said the economy was growing fine, but typical workers were not benefiting because income was being redistributed upward. We can no longer say this.

The Commerce Department revised its growth data last month. It now shows the economy grew much slower over the last three years than we had previously thought. In particular, the new data implies productivity has been growing at just a 1.5 percent annual rate over the last three years. This is the same rate the economy experienced during the long productivity slowdown from 1973 to 1995. It is a full percentage point below the 2.5 percent growth rate from 1995 to 2004.

While productivity may be an alien concept to most people, it is the most important determinant of our standard of living. Productivity measures the value of the goods and services an average worker produces in an hour of work. The standard of living for different segments of the population (e.g., school teachers and hedge fund managers) will depend on how output is distributed, but if the economy is not very productive, then we don't have very much to distribute.

For example, the population of Chad, which has very low levels of productivity, would be very poor even if everything produced were distributed equally among the population. Chad's per capita income is just $1,500 a year. A family of four living on $6,000 would have a very tough time getting by under any circumstances.

Of course, the gains from productivity growth don't have to be taken in the form of more things. They can also be taken in the form of more leisure time. Workers in Europe enjoy an average of more than five weeks a year of vacation, and often put in 35-hour workweeks when they are not vacationing. Europeans can have a great deal of leisure time and still have a comfortable standard of living because they have a high level of productivity during the hours they do work.

Productivity increases could be a way to allow us to have more leisure without large reductions in our income. Higher productivity growth also makes it easier to deal with global warming and other environmental problems.

The fact productivity growth has now slowed is a very bad sign. It means the economy is not doing well by any measure. The argument for conservative economic policy was always that by giving people more incentive to work and invest, productivity would grow more rapidly, and that this would benefit everyone in the long run. It turns out, even with the massive upward redistribution of income over the last quarter century, productivity is now growing at its slowest pace in the post-war period. In short, we are not seeing much growth and the growth we are seeing is going to those at the top.

It is still too early to know whether this recent productivity slowdown will persist. No one saw the 1973 slowdown coming, or the 1995 uptick in productivity growth. Even after the fact, we don't have a good explanation for either event. However, we should be prepared for the possibility the slowdown will continue. This means policies have to be focused not just on improving the situation of those at the middle and bottom, but also at increased productivity growth.

In many cases, this may amount to the same thing. For example, in addition to failing to provide insurance to 45 million people, our health care system is also incredibly inefficient. If we had a universal Medicare system, it would both provide security for the entire population and make the health care system far more efficient by eliminating the waste associated with the private insurance industry. This can be a model for a change that both serves important public goals and increases productivity.

We can also try to catch up with the rest of the world and start giving our workers paid vacations. I don't know if this will increase productivity, but there are few people who would not appreciate a few weeks each year of vacation. If we ended the protections that benefit workers at the high end, workers at the middle and bottom would be able to enjoy their vacations with no cut in pay. This is also, by far, the most effective way to reduce greenhouse gas emissions that anyone currently has on the table. (I'll elaborate in another column.)

There should be no mistake; the slowdown in productivity growth is definitely bad news. We should all want higher, more rapid productivity growth. But this does mean the policy of redistributing income upwards has been a clear failure, insofar as its goal was to increase economic growth. This means we should not be shy about looking to take economic policy in new directions.

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Dean Baker is co-director of the Center for Economic and Policy Research.

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