Death by a Thousand Cuts

Productivity is the gold mine that determines our standard of living and our ability to compete as equals with the rest of the world. Productivity is output per hour of work. If it is rising, there is more economic gold to be divided among us. If productivity growth keeps up with that of our industrial competitors, we can have an equal standard of living and compete on the frontiers of economic activity. Americans will always be able to export; but with productivity falling relative to that of our principal competitors—as it has been—the value of the dollar must continually decline. The country increasingly becomes a relatively low-wage exporter of raw materials and simple manufactured products.

As with any gold mine some smart or lucky prospector finds a vein of high-grade productivity ore. Ordinary miners follow that vein of ore down into the bowels of the economy, but eventually every vein of ore peters out. If the same amount of gold is to be brought out of the mine, new veins of ore must continually be found.

From the beginnings of the industrial revolution to 1965 American productivity grew at about 3 percent per year, but since then the growth of productivity has slowly but persistently declined. Since 1978 productivity has actually been slightly negative (0.3 percent per year). At the end of each of the last three years the average American worker has produced less per hour of work than she or he was producing at the beginning of the year. It is highly likely that 1981 will continue this trend. It has just been announced that nonfarm business productivity declined 2.2 percent in the third quarter. Gold has ceased coming out of the American productivity mine.

Much of the problem can be traced to veins of ore that have petered out but have not been replaced with new sources of ore. For many years America was making large productivity gains by moving workers out of agriculture and into industry. Although agricultural productivity was growing rapidly, it was only 40 percent of the national average in 1948. Every worker released from agriculture and retained by industry represented a worker whose productivity had risen two and a half times. From 1948 to 1965 9.1 billion hours of work left agriculture and entered industrial employment.

As agriculture declined from 17 to 5 percent of all hours worked it made a major contribution to aggregate productivity. A very low productivity industry was getting smaller and its workers were being transferred to jobs with much higher productivity. But by 1972 this process had ended. In the numbers of workers it employed agriculture had become a very small industry and agricultural employment was no longer falling.

The end of that fall in agricultural employment, however, provides an explanation for about 10 percent of the observed drop from 3 percent to 0.3 percent in productivity growth. If American productivity were to have continued growing at 3 percent per year, Americans would have had to find a replacement for the agricultural vein of productivity gold. They didn’t.

Part of the national productivity decline can be literally traced to mining. In 1979 the average American miner was producing only 72 percent as much as he was in 1972 and productivity was still falling at more than 4 percent per year. Twenty percent of this decline in mining can be traced to environmentalism and safety. If open pit mines have to be filled, as well as emptied, it obviously takes more hours of work to mine a ton of coal. If better ventilation and more roof bolts are necessary to protect underground miners, more hours of work are necessary to mine a ton of copper. Benefits have been achieved. Deaths in underground mining have been cut from 1.5 per million hours of work to 0.5 per million hours of work. The only question is whether these results could have been more efficiently obtained at a smaller price in productivity.

But 80 percent of the decline in mining productivity can be traced to a mining activity that most Americans probably do not even think of as mining—oil and gas well drilling. Here America has simply reached a state of geological depletion. Production is falling in old wells and new wells have to be drilled deeper but yield less oil per well. Large pools of cheap oil just are not being found. As a consequence it simply takes more hours of work to produce a barrel of oil.

While measures promoting safety and environmentalism can be reversed if we choose to do so, most of the decline in oil and gas mining productivity cannot. It represents a geological blow from mother nature. If Americans want the old rate of growth of productivity they are going to have to find a new vein of productivity ore to replace cheap oil.

In electrical and gas utilities productivity used to be growing at more than 6 percent per year and is now falling at a rate of a little more than 1 percent per year. Here again a rich vein of ore has simply petered out. Utilities employ most of their workers in maintaining their distribution network—the lines and pipes that bring energy to your house—and not in their production facilities. When average household energy consumption is rising rapidly, productivity rises dramatically. More kilowatts are being delivered but more workers do not have to be employed since the extra output can be distributed through the existing distribution network. When households buy less energy the process is reversed. Fewer kilowatts are being delivered, but the same work force is necessary to maintain the distribution network. Productivity falls.

Here again there is no direct remedy. If energy prices rise, energy consumption will fall. If consumption falls, productivity falls. If we want the old rate of growth of productivity, some new source of productivity gain must be found.

But there are other kinds of problems. The business community and the Reagan administration see the productivity problem as a simple one of too little investment: the equally simple cure is more investment. While there is a real problem of too little investment, the more fundamental problem might be accurately described as a problem of too many babies in the baby boom twenty years ago.

To see why, we must understand that one of the key ingredients of productivity and of growth is the capital-labor ratio—the amount of equipment per worker. With more equipment, workers can produce more output per hour; but as technology improves capital must be adapted to new technologies. To put more productive technologies into place workers must be provided with the new equipment that embodies those new technologies.

The capital-labor ratio in the US was growing at about 3 percent per year from 1948 to 1965 but since 1978 it has started to fall at about 1 percent per year. The decline did not occur because Americans were investing less. Investment in private plant and equipment actually went up from 9.5 percent of the GNP before 1965 to 11.3 percent of the GNP after 1977.

Productivity ceased growing where investment was accelerating. Why? The answer is to be found in the baby boom. The average American laborer works with $50,000 worth of plant and equipment. To be the average American worker and achieve the average American productivity, he has to have $50,000 worth of plant and equipment with which to work. But this means that if the American family had a baby twenty years ago in the midst of a baby boom, it was making an implicit promise not just that it would feed, clothe, and educate its baby, but that it would also twenty years later stop, save $50,000, and equip its baby to enter the labor force as the average American worker.

This implicit promise has not been kept. Americans are investing slightly more, but they should be investing and saving much more. With the amount of equipment per worker falling it is not surprising that productivity is falling.

James O’Toole’s Making America Work is a book with about equal amounts of real gold and “fool’s gold.” When it comes to diagnosing the problem of productivity it is almost completely wrong. But when it comes to recommending new veins of productivity ore, it points to what may prove to be a very rich vein of productivity gold.

O’Toole sees the problem as having three roughly equal causes. Two derive from defective social attitudes on the part of both workers and management: they are less productive because they want “rights without responsibilities”; they indulge in “the culture of narcissism.” The third cause lies with stupid economists who do not know how to measure productivity in the service sector of the economy. These observations may be true or false but none of them has much to do with the productivity problem.

There is no evidence that productivity is falling because of a change in attitudes of the American work force. Attitudes may have changed but productivity is down for some very good reasons that have nothing to do with how people feel about work. Attitudes did not make agriculture into an industry that is no longer declining. Attitudes did not eliminate large, cheap pools of oil. Consumers are cutting back on energy consumption for good, sound, puritan reasons. The baby boom generation was created by the attitudes of twenty years ago—not those of today. The decline in the amount of equipment per worker is real—not psychological.

O’Toole is right to point out that it is difficult to measure the productivity of services such as those supplied by television repairmen, nurses, etc., but services—an expanding sector of the economy and one with generally low productivity—only account for about 13 percent of the national productivity decline. And if, as O’Toole believes, economists are underestimating the improvements in the quality of services—the basic problem in measuring service productivity—services explain even less of the national decline.

Manufacturing is not the only sector where it is possible to get good measures of output and hence good measures of productivity. Bushels of wheat, tons of copper ore, and kilowatts of electricity are all easy to measure. Even in the service sector some of the major components are easier to measure than O’Toole would imply. Consider nursing homes for the elderly. The output is a day of custodial care. How many hours of work does it take to provide it? Quality certainly varies, but so does quality in manufacturing. Service productivity is a problem, but it does not make productivity statistics worthless. And if general productivity statistics are worthless then it is incumbent upon O’Toole to prove that there is a productivity problem after all—a task that he does not undertake.

If one skips O’Toole’s discussion of the problem (Chapters 2 through 4) and concentrates on the cures, one finds that he focuses on something—more worker participation—that should be a new vein of high-grade productivity ore. We know it is a high-grade vein because the Japanese have proven that there is much productivity to be gained if the work force right down on the shop or office floor can be motivated to be interested in raising productivity. The Japanese have proven that productivity is a phenomenon that “bubbles up” from the workplace and does not come from the “top down.” While American productivity has sunk into the negative range, Japanese productivity is rising at 8 to 10 percent per year.

The Japanese have also proven that they can get bubble-up productivity in their American subsidiaries. O’Toole refers to several well-known dramatic successes, such as the old Motorola facilities that were rejuvenated by Matsushita in Chicago. However, while it is true that Matsushita could be said to have retooled the motivations of the work force, as O’Toole describes, it is also true that Matsushita retooled the physical equipment at the same time. A lot of work went into both the “soft” and the “hard” aspects of productivity. But as these examples show, the ability to motivate a work force interested in productivity gains is not solely an ancient samurai tradition. It is exportable if it comes with Japanese managers. What we do not yet know is whether it is attainable with American managers.

What we do know is that it will take drastic changes in American management attitudes and practices if bubbleup productivity is to occur in the United States. Japanese firms let workers make many more decisions. The best manager is one who is running such a smooth operation that he has to make hardly any decisions.

In contrast American managers prove their macho qualities by making many rapid decisions. Japanese firms work with much less hierarchy than American firms. According to O’Toole Japanese auto firms operate with one manager/inspector for every 200 workers while American firms have one manager/inspector for every ten workers. The wage differential between the president of the company and the lowest-paid worker is much lower in a Japanese firm than it is in the typical American firm. Lifetime employment creates an identification with the long-run success of the firm. Major changes are necessary to get bubble-up productivity and it is not obvious that American managers are going to be willing to make them.

But there is also no doubt that if American managers do not change their behavior, they will not be able to compete on an equal basis with firms that have been able to get bubble-up productivity. In the long run Japanese tax laws and regulations are going to be at least as encouraging for investment as those in the United States. If American firms cannot get a work force that is as well motivated as the Japanese, they will in the end fail.

But to say that there is much that Americans must do on the “soft” side of productivity is not to say that “hard” productivity can be ignored as O’Toole ignores it. Americans, faced with the consequences of their baby boom, are investing 11 percent of their GNP while the Japanese without a baby boom are investing 20 percent of their GNP. To keep up with the Japanese on equipment per worker, Americans would have to be investing almost 30 percent of their GNP. Two-thirds of all of the industrial robots in the world work in Japan not because the Japanese invented them but because they are investing enough to afford them. Whatever their motivation Americans will not be able to compete unless they are also working with robots.

Where the United States once unambiguously led the world in research and development, it now seems clear that we are being outspent on civilian research and development. New products and new production processes are increasingly being first introduced abroad. None of this bodes well for future American productivity.

Productivity is not a problem. It is many problems. If I were writing an autopsy on the death of American productivity, when it came to the line calling for the cause of death, I would write “death by a thousand cuts.” But the problem with “death by a thousand cuts” is that salvation requires a thousand band-aids. There is no one major operation that can cure the patient and each of those thousand band-aids is difficult to apply.

It will be difficult to build a well-motivated work force interested in teamwork and bubble-up productivity. It will be difficult to force down consumption to make room for a lot more savings and investment. It will be difficult to phase out and restructure old and dying industries with low productivity.

The British have faced our productivity problem since the turn of the century, when the United States first surpassed them in per capita production. They have never been able to do the difficult things necessary to solve their productivity problem. Last year East Germany passed them in per capita GNP. The Germans can make communism work better than the British can make capitalism work. But there is nothing wrong with the British character. When they faced a crisis in 1939 they pulled together as few societies ever have. What they could not solve is the problem of slow economic rot.

The United States suffers from slow economic rot. Fortunately we have the Japanese challenge going for us. If their productivity was growing 1 percent per year while ours was stagnant, our economic defeats and declining relative standard of living would be so slow that we would never notice them. But with Japanese productivity growing 8 to 10 percent per year the defeats come to quickly that they may force a feeling of crisis.

American firms are being run out of business not slowly, but quickly. General Motors is experimenting with small groups of workers—“quality control circles”—to control productivity, not because they like them but because they feel that they must. If they don’t do something new, they will be driven out of business.

That same pressure may in the end be what forces the entire American economy to look for new veins of ore in its productivity gold mine. As someone who spent some time working underground in a copper mine in Montana, I can testify that no one goes underground because they like it. Miners undergo the risks and hardships because there is gold underground and because economic privation awaits them above ground if they don’t go down. The same two motives may force Americans back into their productivity mine—or so we may hope.