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Politicians say we have the most productive workers in the world. They don't know what they're talking about.
In 1939, when John Steinbeck completed The Grapes of Wrath—a heart-wrenching tale of a family of sharecroppers forced out of their home during the Depression— roughly one-quarter of the U.S. population still lived on farms. Today, family farms are increasingly rare, and less than 2 percent of employed Americans work in agriculture.
But rather than viewing the decline of farming jobs as a tragedy, economists almost invariably count agriculture as a shining American success—the triumph of productivity. And why not? A handful of farmers using GPS-equipped combines and sophisticated moisture sensors can grow far more food than the population of an entire rural county in 1939. Food has become so plentiful and cheap in the United States that it has been blamed for the increase in obesity. And agricultural products have become one of the country’s chief exports, totaling more than $115 billion in 2010.
As the story of the American economy is usually told, the shrinkage of agricultural employment was a tough but essential part of the march toward higher incomes and a better standard of living. What’s more, this example has been cited time and again to explain subsequent upheavals in employment. In 2003, N. Greg Mankiw, a Harvard economist who then headed President George W. Bush’s Council of Economic Advisers (CEA), told a Washington audience that the more recent fall in manufacturing jobs was an “inescapable” consequence of rapid productivity growth: “The long-term trends that we have recently seen in manufacturing mirror what we saw in agriculture a couple of generations ago.”
In a 2006 speech, University of Chicago professor Austan Goolsbee made the same point, explaining why the long-term decline in manufacturing jobs didn’t worry him. “Employment in the [manufacturing] sector and the share of spending in the sector get smaller and smaller almost as proof of how productive it has become,” said Goolsbee, then a top economic advisor to Senator Barack Obama and more recently CEA head under President Obama. “It is exactly the same process that agriculture went through.”
Numerous statistics would appear to confirm Mankiw and Goolsbee’s analogy. Manufacturing employment in the U.S. is on a long downward trend, with no sign of a rebound. Despite the supposed recovery, companies are still announcing factory shutdowns and consolidations. One example: in Fort Smith, Arkansas, a Whirlpool refrigerator plant currently employing about 1,000 workers will close its doors by the middle of 2012.
Nevertheless, these ever-fewer workers seem to be producing ever-larger quantities of manufactured goods, such as electronics, aircraft, medical equipment, and chemicals. According to the Bureau of Economic Analysis, American manufacturing output was 16 percent higher in 2010 than it was a decade earlier, despite the devastating impact of the Great Recession and the virtual disappearance of some manufacturing industries. Combined with the sharp plunge in employment, the BEA statistics imply that manufacturing productivity rose by a stunning 74 percent from 2000 to 2010. Companies that distribute and sell these goods, like Walmart and Best Buy, also seem to be enjoying sizable efficiency gains. According to government data, wholesale and retail trade companies have seen a 20 percent increase in productivity since 2000, as information technology and the Internet enables them to deliver more goods with fewer people.
These statistics undergird one of the chief messages of reassurance that has been repeated throughout the economic crisis: yes, factories may be closing, and whole domestic industries may be withering left and right, but Americans should take heart because we have the “most productive” workers in the world. This refrain has been voiced to the American people by everyone from Barack Obama to Mitt Romney, from Richard Trumka, president of the AFL-CIO, to Tom Donohue, head of the U.S. Chamber of Commerce.
Whenever leaders and economists cite this reported strength in productivity—and the historical precedent of agriculture—they are advancing a certain basic theory of our current situation. The U.S. economy is fundamentally sound, the theory goes, and could create broad prosperity if only Washington made some targeted policy interventions. (The nature of the proposed quick fix—stimulus money or tax cuts—varies according to party affiliation.) After all, if the analogy to agriculture holds true, then rising productivity in the manufacturing and distributive sectors should eventually pay off in higher real wages and higher living standards for Americans. Today’s high poverty and unemployment rates will only be part of a painful but temporary period of disruption, as exports of manufactured goods increase and unemployed workers are gradually absorbed into other sectors of the economy, just as an entire generation of farmworkers moved north and west to work in factories.
There are two big problems with this theory, however. One is that the analogy between agriculture and manufacturing is profoundly misleading. The gains in agricultural productivity that transformed this country in the twentieth century are fundamentally different from the gains in manufacturing and distributive productivity we are seeing today. The other, related problem is that our bullish measures of productivity suffer from an enormous statistical blind spot. Rather than wait for rising productivity to save the day—and relying on economic policies that are essentially complacent—the U.S. needs to adopt drastic measures if it wants to keep living standards from falling.
Consider, for a moment, what a farmer has to do to improve the yield of a corn or wheat field in Kansas or Nebraska. Machinery has to be purchased to plant and harvest the crops. Pesticides and herbicides have to be applied to fight bugs and weeds. Irrigation has to be used appropriately to make sure the crops mature as desired.
In a very real sense, agricultural productivity is intrinsically rooted in American soil. Yes, the tractor might be imported from Japan. But a farmer cannot plant crops in Iowa and then outsource the harvesting to Vietnam. Pesticides have to be sprayed on American bugs, and crops have to be irrigated with American water. Most of the value created by agriculture is made in America.
By contrast, most manufactured goods these days are the product of global supply chains, which may include multiple countries and border crossings. Your smartphone, for example, is assembled from components that were manufactured all over the world. On a less high-tech note, the cedar hangers that organically keep your suits and dresses free of pests may be made of wood grown in the U.S., shipped to China for manufacture, and then shipped back to the U.S. again.
Given the dominance of global supply chains, manufacturers and distributers both have two very different strategies available to them for cutting costs. On the one hand, they can invest in raising productivity in their domestic operations. A midwestern auto factory can rearrange its assembly line to produce more cars with fewer workers; a retailer can shift more sales to its online division; a real estate agency can invest in contact-management software to help fewer brokers manage more potential buyers and sellers.
Andrew on January 11, 2012 10:28 AM:
Great article. I have a funny feeling that a lot of players in DC would rather not know the truth. They would rather hang on to their ideological hobby horses.
Matthias on January 11, 2012 10:42 AM:
Well argued and clearly written. We really need more of this kind of thorough analysis.
RepublicanPointOfView on January 11, 2012 12:36 PM:
What a misleading article!
When our politicians say that America has the "most productive" workers, they are correct. You just fail to understand what they mean!
When they say America, they mean Corporate America which, of course, really means International Corporate America.
When they say "most productive", they mean that their workers produce more and more wealth for the already wealthy.
I look forward to January 21, 2020!
On that date, the 10th anniversary of Citizens United Not Timid vs FEC, we shall officially rename this country The United Corporations of ameriKKKa. The 21st of January shall become a national holiday formally observed by all with selected politicians publicly paying homage to those who own them.
To increase the productivity of workers given that day off from work, the Thanksgiving holiday will be eliminated and the 4th of July declared superfluous. Naturally, the Presidents Day holiday that some currently enjoy shall be deemed inappropriate to our new nation with its CEO selected by the Corporate Board of Directors.
What a joyous day to celebrate when our country has returned to the economic success of 1) The wealthy having greater wealth; 2) The reduction of the middle class to those who provide direct services to the wealthy; and 3) all taxes being paid by the peons to whom employment has been granted. Never forget that a job is a privilege granted to you by the wealthy and not a right!
PEA on January 11, 2012 12:40 PM:
Great job highlighting and explaining some fundamental issues. It's truly what should matter to the 99%. Needs to be widely shared!
Can the analysis you suggest the BLS do also be done by academics and grad students (perhaps with funding from enlightened foundations)? Great training for future economists and arguably more credible results, if their assumptions and methods are made public along with the results (like science). As you note, both parties engage in false assumptions or rhetoric about the economy, so real change might have to be initiated outside govt.
Another way in which so-called increased productivity can be misleading happens when everyone else has to pick up the slack after a down-sizing. I know many conscientious professionals who have soldiered on, doing 150% work for years and not being paid for their extra effort and hours. The negative side effects of this so-called increased productivity are often hidden: superficial work, mistakes, poor planning, omissions, etc., (e.g through lack of time, lack of knowledge by remaining employees, or their eventual resentment. This undermines the quality of output, and ultimately the sustainability of the business or public sector work. The regular cramming of too much work onto the shoulders of too few employees can seriously undermine their health, increase stress on their families, etc.--all of which have real costs pushed by the employer onto the employees (somewhat like the collateral damage of physical pollution that is often not paid for by the polluters). So while reducing the workforce can be ok for awhile (especially if there were redundancies in the system originally), the increased stress in the system can ruin it in the long term.
Alan on January 11, 2012 1:39 PM:
For many years, the American voter has been told that globalization will allow Americans to move into "higher value" jobs, increasing wages and standard of living. To the extent that has worked in the past, great. But it appears that easy gains have already been realized and that more recently, as jobs have moved overseas, it has resulted in rising unemployment and stagnant or reduced wages here in America.
We need to find some way to get back to the basic promise of American jobs and wage growth. The best way to do that is to (a) ensure that American companies and the workforce can be globally competitive and (b) tie the sale of goods and services in America to American jobs.
I believe that the following policies would solve these problems withing a free market framework:
1. Eliminate corporate taxes, so that there is no tax advantage to locating a company offshore.
2. Provide universal healthcare and retirement benefits, so that companies do not have to pay these costs for American workers.
3. Subsidize regulatory compliance in key or strategic industries. If overseas manufacturing operations have lower regulatory costs, then all of part of the incremental costs of regulatory compliance in the USA would be paid for by the government.
4. Pay for all of the above with (a) personal income taxes and (b) a VAT tax on all consumer products sold in the USA. Overseas manufacturers would pay the same taxes as American manufacturers, eliminating the tax benefit of manufacturing overseas. Services would not be taxed, removing the tax benefit of moving services such as call centers overseas. Exports would not be taxed, allowing American manufacturers to compete with foreign manufacturers for global sales. Products used exclusively in business would also not be taxed, to remove any tax penalty on locating a business in the America.
5. Finally, as a key component to the plan, eliminate welfare and unemployment benefits and replace these with an employment program that subsidized wages to the extent necessary to provide job opportunities to all American workers. This could be done through the free market, in order to ensure that worker's skill are being put to their most productive uses. For example, each month or quarter, the Department of Labor could set a wage subsidy amount that would be paid for every American that is employed, provided that they are paid a minimum amount. The amount of the subsidy would the set to match employment demand and supply, and the VAT tax would raised or lowered as necessary to cover the costs of the subsidy. This program would indirectly tie the sale of good and services in America to American jobs: if moving jobs overseas resulted in the unemployment here in America, the wage subsidy, paid for by the sale of products in the USA, would rise until the jobs came back.
A plan such as this would help restore the competitiveness of American companies and workers, while ensuring that all citizens benefited.
G Ray on January 11, 2012 1:42 PM:
Interesting article. Looks like we need better and more government analysis and statistics.
In an article in the NTY in August last year there were a number of excellent graphs that showed another part of this issue. I don't have the URL but I did print out the graph.
The productivity (measured poorly according to you) rose 80% from 1979 to 2009. But the hourly wages only went up 7-8%. Where did the money from this extra productivity go? To income of the top earners. The top fifth of earners went up 55%.
So along with inaccurate productivity statistics the increase in gain in productivity did not increase the wages of the average person. Just the top managers.
We have a big problem that is only getting worse.
Thanks
G
skeptonomist on January 11, 2012 2:24 PM:
This piece makes some good points but ignores the inequality in political power between labor and capital. True international competition would level not only wages, but profits and managers' compensation, but capitalists, especially American ones, can use their political power to maintain monopolistic positions. It is difficult for labor to organize internationally and those in control of the media and government can use nationalism to put workers in competition.
Economists exacerbate this situation by focusing on relative "labor costs" and generally ignoring capital costs when considering international trade positions.
Rick on January 11, 2012 2:24 PM:
Well written and thought provoking article. I had not thought about the difference between supply chain and production productivity. It seems to me though that increased domestic productivity does not necessarily lead to more jobs. My thought is quite the opposite. Automation can and has led to greater productivity and loss of jobs. Displaced workers will need to learn new skills or move to less skilled and lower paid work.
This article gives a slightly different perspective.
http://www.theatlantic.com/magazine/archive/2012/01/making-it-in-america/8844/?single_page=true
R.T.Thaddeus on January 11, 2012 2:57 PM:
There is another more common ploy used to claim "increased productivity." A unit of ten workers produces 100 widgets a day at a cost that includes salary and benefits, the largest costs associated with producing the widgets. The unit of ten is "downsized" to five, but still required to produce 100 widgets a day. Presto, a huge gain in productivity. And if the workers are soon required to produce 120 widgets a day, still more productivity gain. Of course the stress increases on the workers with attendent health problems, personnel problems and other debilitative effects, but productivity shows up on the bottom line as a big increase. Still more productivity could be gained if humans could be replaced by robots. Robots don't have to be paid, fed, housed, clothed or otherwise coddled.
Keith on January 11, 2012 3:11 PM:
Your critique of BLS statistics on productivity makes sense, but I am skeptical about the bulk of your proposed solutions. We certainly need to find ways of measuring true rather than illusory productivity, but using better measures to direct an industrial policy is an unnecessary extension of the idea that has no likelihood of a good payoff. Ours is not a central planning culture, and while we can do a good job of planning particular expenditures, such as building the TVA, we have never created an industrial plan as such. We lack the planning infrastructure that countries like Japan, China, or France have long developed, we lack the faith in planning that they possess, and our orientation toward change makes grand planning especially difficult. Our best planning took place during the Constitutional Convention after the Revolution, and consists of organizing our political structure. From that we get the historical emphasis on education and a minimization of social control as the best ways of advancing our people and our prosperity. Anyone who reads the wonderful Atlantic article cited earlier by Rick on January 11 will see how valuable that educational infrastructure remains even today, and there is likewise plenty of careful research to support the value of our entrepreneurial culture that the minimization of social control fosters.
Dave on January 11, 2012 6:47 PM:
According to the latest numbers, manufacturing job growth last year (2011) was the strongest since 1997.
DHFabian on January 12, 2012 7:54 AM:
My understanding of the issue of American productivity: With the Reagan administration, the Republicans created the myth of "lazy/spoiled American workers" to justify what came to be known as the "war on the working class." The goal was to increase productivity while decreasing wages and workers' protections (i.e., "working harder for less"), "enhancing corporate profits." At the time, American workers were compared to Japanese workers who gave up everything for the sake of their employers. By contrast, "lazy" Americans demanded overly-generous generous wages and benefits for doing little more than showing up at work. This, we were told, was driving corporations into bankruptcy, destroying the US economy. And indeed, Americans largely agreed to work far harder and longer for less. Facts have an annoying way of ruining the best-planned agendas. We learned how the zeal to surrender personal lives to employers, living to work, took a very heavy toll on the Japanese people. Instead of benefiting the nation, their economy collapsed. The facts about actual US worker output and quality found their way into the public discussion, threatening the continued upward redistribution of US wealth. We saw that while worker productivity and quality increased, and corporate profits soared, incomes fell and poverty significantly increased. .Unfortunately, by this point, US workers had surrendered almost everything, the economy collapsed, and time will tell if it's possible to restore our former quality of life.
anonymouse on January 12, 2012 8:04 AM:
This is one way to tell your readers that you value their click stats more than the readability of your articles.
To all of the entrenched old people on your staff attempting to design webpages like newspapers: You won't run out of paper by printing the article all on one page. I promise.
James Vick on January 12, 2012 2:18 PM:
Agreed: Productivity is the sole source of quality of life improvements. Yin-Yang: Yes, agriculture productivity has contributed to fat people's problem. Countermeasure: Do not blame the farmers. Those lacking discipline (the fat folks)deserve blame. Productivity in government: What is BLS productivity? You do not know. So, how is it known it is underfunded? Would it be closer to zero like that of the SEC agents, who spent their workday on internet porn sites? Management: Good managers consistently elevate the productivity of their workforce. However, they do not do that for the sake of productivity. Their primary job is to create assets far greater than liabilities. Productivity contributes to that, but if a supply chain enhancement outpaces productivity growth, then that will be done.
Robert Hallsey on January 12, 2012 6:36 PM:
Michael Mandel writes, "Today's high poverty and unemployment rates will only be part of a painful but temporary period of disruption, as exports of manufactured goods increase and unemployed workers are gradually absorbed into other sectors of the economy, just as an entire generation of farmworkers moved north and west to work in factories. There are two big problems with this theory, however."
===
While I enjoyed Mandel's analysis, I believe the theory has a greater problem, one that most people overlook. As agriculture stopped being a source of mass employment, manufacturing rose to become one. Now that manufacturing is ceasing to be a source of mass eployment, no new source of mass employment is emerging.
That is the approaching waterfall nobody on this boat seems to notice. There's no way to avoid it either. Even without any offshoring at all, automation would continue to lower the number of people needed to create all the goods and services the market can clear. And it's futile to point to rising manufacturing employment at home. The increase is too small to make a difference. We have to face it: manufacturing as a source of mass employment is dead, and there's no new employment paradigm.
mark vickers on January 13, 2012 10:49 PM:
Amazing and potentially very important article. Thanks so much for writing it.
Evagneline Brabant on January 14, 2012 2:03 PM:
Well, we used to have the most productive workers in the world, even with the union thugs limiting our productivity.
However, within twenty years of the start of Affirmative Action hiring, our GNP had declined by over 30%.
For those not in the know, minorities were hired who were not even remotely as qualified as the white males they replaced.
Harry Moser on January 14, 2012 5:59 PM:
Excellent article! I do have several important refinements:
1. The article repeatedly refers to companies seeking lower prices offshore. An important part of the solution is to convince companies, instead, to make their decisions based on total cost of ownership (TCO), including as many as 29 costs, e.g. carrying cost of inventory, IP risk, impact of separating manufacturing from engineering, etc.
2. Calculating value-added based on price instead of TCO overstates the actual savings due to offshoring and thus further contributes to the exaggeration of productivity.
I was one of the business executives in Pres. Obama�s excellent Jan 11, 2011 Insourcing Forum. I emphasized, and the assembled executives and union leaders supported, the need for companies to more consistently utilize total cost of ownership analysis instead of price variance in making their sourcing decisions.
The non-profit Reshoring Initiative, www.reshorenow.org, provides for free a Total Cost of Ownership (TCO) software that helps corporations calculate the real offshoring impact on their P&L. Readers can bring back some manufacturing by asking their companies to reevaluate offshoring decisions. Suppliers can use the TCO software to convince their customers to reshore.
sleepyhead on January 15, 2012 12:03 PM:
The American consumer will not boost spending until we know what's up with our house. Let's start the recovery with shaking out the real estate mess.
cwolf on January 16, 2012 4:18 PM:
We're Number One !!!
...at producing Obese citizens.
Half the "jobs" in the US require little more than the ability to say "Super Size...", or "paper or plastic"
Alzatex on January 23, 2012 8:20 PM:
With robotics coming on strong it may be necessary for American manufacturing to get more efficient. For example German manufacturing make use of Timing equipment for production and understand the benefit of a timer on any production line. Alzatex timers are high quality and have increased production for many American companies with a return on investment within months, sometimes in weeks. http://alzatex.com
Mike Muoio on January 25, 2012 11:17 AM:
Yes...great article and I have been telling the boss similar stuff see below.
We do need that audit as we cannot identify the abuse we are bearing without it.
Great insight....and I did enjoy seeing you on C-Span.
September 21, 2011
President Obama
The White House
1600 Pennsylvania Avenue
DC 20500
Mr. President,
Sadly I learned this morning that General Motors is moving its electric car development to Shanghai to work more closely with SAIC. How do you feel about this having had the US Taxpayer save the bastards from certain bankruptcy?
Why don’t you call Steve Rattner and figure out just what the new “management” is thinking on this one.
I thought the new technology was to be a domestic focus of your policy.
Well if you believe this is the way to execute that policy, you really need to heed the advice that follows.
Mr. President I would again, for the seventeenth time, ask you to get your game together or refuse to run again. I am your base and you have lost me and the only reason you would get my vote is I refuse to vote for wacko neo- fascists.
Please seriously consider not running or an immediate resignation. Some people just are not cut out to be leaders and so far you have simply refused to lead.
I have copied Secretary Clinton on this note to let her know she is our only hope to maintain the White House in 2012.
Please lead and get these programs initiated or get out of the way of progress.
We cannot drive economic recovery via tax cuts, temporary increased consumption, silly trade policy and monetary easing.
We must drive it via manufacturing, exports and infrastructure reconstruction.
The prima fascia evidence on trade over the last 30 years would strongly suggest that, “free trade” is not good for American workers and we have lost over 50,000 factories and 20 million jobs mainly to China. (B. Clinton and WTO)
If your advisors (“Transnational Pawns”) told you that this would not happen with a new Korean deal, you need to fire them immediately as they have and will continue to cause major damage to your credibility.
Your support for these deals make you look like a proud member of the National Chamber of Commerce, which is a truly un-American institution and borderline fascist organization.
Mr. President I would remind you for the seventeenth time that you might very well lose the 2012 election unless you start to demonstrate some leadership on JOBS, TAXES and the BUDGET! Your prospects for reelection continue to dim.
I will keep this brief. Four concepts you need to communicate effectively and with extreme passion as soon as possible.
1. Jobs
Effective immediately, via Presidential Emergency Order, everything that enters America that is manufactured will have a 30% tariff.
This is a much more effective means to achieve free and fair trade than debasing the dollar and it will preserve raw material prices, not to mention keeping oil affordable. The policy you have adopted is crushing the elderly interest rate driven incomes, and you are killing the driving public and economy with gas price inflation. It will also keep direct foreign investment here! (In Q1 direct foreign investment declined 52%).
2. Taxes
Effective immediately, via Presidential Emergency Order, the Pre-Reagan tax rates go into effect. In addition, all federal corporate taxes are abolished.
We simply must have the revenue. By eliminating corporate taxes, 67% do not pay taxes now; you can eliminate all the tax law and deductions etc associated with corporate tax. This should be red meat for your loyal opposition and they will support it.
It would also help get them out of the lobbying business.
3. Defense
We will reduce defense, by Presidential Emergency Order, over a three-year period by a fa
Dig Deep on January 30, 2012 7:49 PM:
The author mentions regulations - but not the real consequences of allowing imports from emerging market producers that have very low regulation costs versus our domestic reg's and subsequent costs.
Until this imbalance is remedied, we'll continue to lose jobs. My opinion is that we do have too many reg's, but clean air & water and a workforce with benefits makes sense.
So why is it that we impose these higher costs upon ourselves and allow off-shoring to circumvent our local laws and ship the goods right back to our own retail shelves? Could it be crony captialism with politicians favoring powerful mult-nationals?
Rory Larson on February 10, 2012 8:42 PM:
Aside from inaccurate statistics, I think a deeper issue may lie hidden in a failure to grasp the difference between micro- and macro-economics. Value-based terms like "efficiency" and "productivity" are always subjective. They make sense only where you are identifying with a single party with a well-defined budget and a linear measure of success. But when we shift to macro-economics, these terms are absolutely meaningless, because there is no such thing as objective value. An economy is not a single business enterprise; it is an entire ecosystem, in which all players are struggling to make their living in competition with all the rest. If we measure efficiency from the point of view of company management, then maximizing company profits over expenditures is efficient, whether that means automating to lay off employees, working remaining employees more effectively (e.g. longer and harder), or finding cheaper employees. In that case, the manager who saves his company a million dollars by outsourcing and offshoring to a cheaper source of whatever they have hitherto paid local workers to do, has indeed greatly increased the productivity of his company. The fired employees, on the other hand, have just lost their means of making a living, and their households have become much less productive.
Perfect efficiency and productivity from the companies' point of view would mean that they would be able to produce enough to satisfy all the world's wants, either robotically or through slavery, without having to pay anything to anyone else. The catch is that nobody else would be able to buy their products, because other people would have nothing of their own to offer that the company owners would need. In that case, there would be no reason to continue manufacturing anything beyond what the owners themselves would consume, and the rest of the population could be left to starve while the owners focussed on a death struggle with each other to buy control of all strategically important assets while maintaining hyper-efficient security systems to protect themselves from the desperate masses, and from each other.
The economy is not a cooperative; it is an ecosystem of mutually competitive living things. Beyond the point of total energy and material that can be extracted from the environment, increased efficiency and productivity for the occupants of one niche means starvation and death for others.
Rory
Joe_Lighthorse on February 21, 2012 12:36 PM:
Shines a bright light on yet another abstraction bandied about by many (mostly Republican) politicians.