[Paleopsych] NYT: What Makes a Nation More Productive? It's Not Just Technology

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Mon Jan 9 15:38:20 UTC 2006

What Makes a Nation More Productive? It's Not Just Technology

[Before you start bellowing that the most important factor in productivity was 
left out, be aware that this article is dealing with *changes* in the last five 
or ten years. It is still into the future before technology will allow changes 
in brain size and IQ to have a major impact in 5-10 years. Emryo selection and 
eugenic breeding takes a whole generation.]

Economic View

IN 2001, the stock market meltdown and a brief recession threw cold
water on the widely held belief that the United States economy, juiced
by a technological revolution, had entered a new era of limitless,
inflation-free growth. But today, as bubble-era books like "Dow
36,000" collect dust on library shelves, evidence is mounting that
there may be a new economy after all.

In the late 1990's, growth in labor productivity - the amount of
output per hour per worker - kicked into a higher gear. From 1996
through 1999, it grew at a blistering annual rate of 2.5 percent,
compared with 1.4 percent from 1972 to 1995. Economists generally
believed that the higher rate was a byproduct of the new economy. Much
of the growth was spurred by the highly productive businesses that
made information technology products - companies like Dell, Intel and
Microsoft - and by their customers, who spent heavily to deploy
productivity-enhancing PC's and software.

"About half of the growth resurgence from 1995 to 2000 was due to
I.T.," said Dale Jorgenson, university professor at Harvard and a
co-author of the recently published "Information Technology and the
American Growth Resurgence."

As the technology investment boom of the 1990's gave way to bust in
2000, many analysts feared that the productivity gains would
dissipate. Instead, productivity since 2000 has grown at a
substantially higher pace than it did in the late 1990's. And
productivity growth is still strong. This month, the Bureau of Labor
Statistics reported that productivity in the third quarter was up 3.1
percent from the same quarter last year.

A new report by the McKinsey Global Institute, the research arm of the
consulting firm McKinsey & Company, found that sectors other than
technology have been driving the growth in the post-bust years. "The
I.T.-producing industry itself, with its extraordinarily rapid pace of
change, certainly has contributed to overall productivity growth,"
said Martin Baily, a senior fellow at the Institute for International
Economics, based in Washington. "But now we're getting a bigger share
from the rest of the economy." Mr. Baily, a former chairman of the
Council of Economic Advisers in the Clinton administration, was
co-author of the McKinsey report with Diana Farrell, the director of
McKinsey Global.

In the late 1990's, McKinsey found that six of the economy's 59
sectors accounted for virtually all productivity growth. Among the
biggest contributors were new-economy industries like
telecommunications, computer manufacturing and semiconductors. But
from 2000 to 2003, the top seven sectors accounted for only 75 percent
of the productivity increase. And five of the top contributors were
service industries, including retail trade, wholesale trade and
financial services. That is surprising, since economists have
generally believed that it is much harder for service industries to
reap sharp productivity gains than it is for manufacturers.

To be sure, service industries have become more productive in recent
years by continuing to invest in information technology. Yet there are
also other factors at work. "I.T. is a particularly effective enabling
tool," Ms. Farrell said. "But without the competitive intensity that
drives people to adopt innovation, we wouldn't see these kinds of

To compete with Wal-Mart, for example, retailers of all stripes have
been working furiously to gain scale, to manage supply chains and
logistics more effectively, and to negotiate better terms with
suppliers and workers.

A similar dynamic has played out in the finance sector, where there
has also been a huge gain in productivity. It is likely that
competition and structural changes are responsible for those gains -
both in the late 1990's and in recent years. Commissions for stock
trades have fallen sharply amid relentless competition; spreads in
stock trading have narrowed, thanks to rules promulgated by the
Securities and Exchange Commission; and trading volume has risen,
thanks to the proliferation of investors. Add it up, and you have more
volume at lower cost to the customer. And when the stock market cooled
after the Internet bubble, companies in the once-hot financial sector
began to focus on cutting costs and eliminating unprofitable
operations. Those moves further bolstered productivity.

One mystery of recent years has been the enduring gap in productivity
growth between the United States and Europe. In this case, another
structural force - regulation - may be at work. "In economies with
less regulation, companies can use information communications
technology that link sectors to one another in ways that create joint
productivity," said Gail Fosler, executive vice president and chief
economist at the Conference Board.

Because domestic retailers don't face the same sorts of restrictions
on working hours and road use that European retailers do, for example,
the Americans have been better able to use technology to manage
trucking fleets, deliveries and inventory.

The encouraging news, some economists say, is that a major
breakthrough in information technology is not required to fuel further
productivity growth. "It's not research and development that cause the
big gains in productivity," Professor Jorgenson said. "The real
drivers are things like competition, deregulation, the opening of
markets and globalization."

AS the gospel of increased productivity spreads to a wider range of
sectors, more companies keep trying to figure out how to do more with
the same amount of labor - or with less. For macroeconomists, that is
good news. But there is a downside. In the past few years, payroll job
growth has been far less robust than usual for post-recessionary
periods. And because high productivity means that the economy can grow
smartly without the addition of new jobs, some job seekers might wish
that companies were a tad less efficient.

Mr. Baily says that there does not have to be a trade-off between
productivity and job creation. "Historically, in the U.S. and in other
countries, periods of rapid productivity growth have been periods of
strong employment growth," he said. That was certainly the case in the
late 1990's.

Why has the experience been different in the last several years? "The
loss of manufacturing jobs after 2000 was just huge, and those jobs
haven't come back," Mr. Baily said. The Big Three automakers have shed
tens of thousands of jobs since 2000 because of competitive pressures
and a drop in demand for their products. And it is likely that General
Motors and Ford would be retrenching even if productivity in the
service sector was growing at a much slower rate.

"It's hard to blame productivity growth for a lot of manufacturing job
losses," Mr. Baily said.

Daniel Gross writes the "Moneybox" column for Slate.com.

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