Friday, May 15, 2009

Rising Productivity

In Business Week, Michael Mandel points out that labor productivity continues to rise despite the economic downturn. Mandel points out that productivity dropped during two past historically deep downturns - the Great Depression and the steep recession of the early 1980s. Mandel explains that there could be a positive interpretation of this productivity growth today:

So why, today, are we blessed with the unlikely combination of deep recession and rising productivity? The optimistic explanation is that American businesses have gotten religion and are aggressively squeezing out waste and boosting efficiency.

However, Mandel also offers a cautionary note. Perhaps, this productivity increase will be harmful in the long run. He explains that companies have been cutting professionals, which could be worrisome:

In the short term, when a company cuts professionals, output per hour goes up. A pharmaceutical company could, in theory, ax its entire research operation without affecting current sales. And an automaker that laid off its new car designers could still churn out the same number of vehicles, and productivity would rise.

The danger: If the economy is stuck in a slow-growth recovery, companies may not be quick to rehire their professionals—and that would be a disaster. Professionals are the people who do the research, the new-product development, the information-gathering, the training, and even the marketing which moves the economy forward. They are the main source of the "intangible investments" necessary for innovation and future growth. In effect, we could be eating our seed corn to get through the financial crisis—and the official stats would not warn us.

I think it's an interesting issue to consider, and naturally no clear answer exists to this puzzle. In general, though, I'm inclined to favor the optimistic view. Mandel, for instance, does not mention that productivity grew in both of the last two recessions (early 1990s and 2000-2001).