WASHINGTON, Oct. 23 (UPI) -- The American Enterprise Institute Wednesday held an all-day conference on productivity in the 21st century, including presentations by Labor Secretary Elaine Chao, Chairman of the Council of Economic Advisers Glenn Hubbard and no less a luminary than Federal Reserve Board Chairman Alan Greenspan.
Most of it was intellectually dispiriting, like listening to an Enron financial presentation given by Andrew Fastow.
It is the belief, cult-like in its intensity, of Chao, Greenspan, Hubbard and such other speakers as Bureau of Labor Statistics Commissioner Kathleen Utgoff that a so-called productivity "miracle" occurred, beginning in 1995 and continuing to this day, that justifies record high stock market valuations, lax monetary policy and optimistic budget forecasts.
However, the raw data do not support this contention.
According to BLS data as revised in July, non-farm productivity growth increased from 1.4 percent per annum in 1973-1994 to 2.5 percent per annum in 1995-2000, with a continuing increase at 2.8 percent per annum in the five quarters since the recession began in March 2001. This leaves out the first quarter of 2001, which was poor!
The most recent data (for 2001-2002) is, of course subject, to revision in July 2003. The past three such annual revisions to productivity data have all been negative, by substantial amounts.
Even if we take these figures as gospel, does it constitute a miracle?
The year 1973 is a very carefully chosen start date for the comparison, as is 1995 for the "miracle."
For 1973 was the year the oil crisis hit and plunged the United States into a productivity nightmare for a decade. The 1947-73 growth rate of 2.87 percent per annum deteriorated very sharply to a 1973-82 growth rate of 0.84 percent per annum.
It's pretty clear in retrospect what was responsible for this; the oil price shock caused a surge in unproductive investment and a plunge in the stock market.
This continued in inflation-adjusted terms, accompanied by high inflation and counterproductive economic policy, for the next nine years.
But 1995, on the other hand, was the year the stock market took off, causing a huge surge in capital investment, increasing labor productivity even if multi-factor productivity (excluding the effects of increased capital usage) had remained constant.
Multi-factor productivity showed a modest increase (to 1.3 percent per annum) in 1995-99, but, according to Hubbard, actually declined in 2000-2001.
Official figures for 2001 will be published by the BLS only in March 2003.
If, instead of taking 1995 as a starting date, you take the beginning of the '90s boom in 1992, the 1992-2001 productivity growth rate (recession to recession, or maybe end-recession to beginning-recession) for non-farm businesses, by BLS statistics, was 1.81 percent per annum.
The productivity growth rate from 1982 to 1992 (also recession to recession) was 1.94 percent per annum.
In short, even if you assume there to have been an acceleration in productivity growth in 1995, and ignore the early '90s, there was no productivity miracle. Productivity growth was lower even in the boom years than in 1947-73.
Whether there will be shown to have been any long-term acceleration at all in 1995 (as there certainly was, halfway back to pre-1973 levels, in 1982) is yet to be determined, but miracle there was none.
The Greenspan claims a few years ago, eagerly backed by almost all commentators, of a magical New Economy productivity miracle, that justified late '90s stock prices, have already been deflated to a return -- at most -- to productivity growth levels below those of the post-war quarter-century. These may yet disappear altogether.
This is very important. If there was no productivity miracle, then there is no justification for stock valuations significantly above the long-term average -- which would mean a level of 5,000 on the Dow today and 600 on the S&P 500 Index.
If there was no productivity miracle, then the 2003 U.S. budget presented earlier this year by Hubbard on behalf of the Bush administration, which assumes 2.1 percent productivity growth from the inflated 2001 level, is not conservative (as was claimed in the conference) but optimistic.
Not by much: 1.8 percent would be a reasonable 10-year productivity growth assumption given the data above. But it would still be significant. As Hubbard pointed out, a 0.2 percent different in productivity growth makes a difference of $266 billion in gross domestic product 10 years out.
A 0.3 percent shortfall, as seems likely, means a shortfall of $400 billion in GDP by 2012, so at least $120 billion in the annual budget deficit compared with the proposed budget
Greenspan, in his presentation, focused strongly on the as yet unrevised 2001-02 data to show that productivity growth remained strong and all was well with the world.
As he began his address, "the increase in non-farm business output per hour over the past year will almost surely be reported as one of the largest advances, if not the largest, posted over the past thirty years."
Technically, he may be correct on this, by choosing his words very carefully.
The "past year" presumably means the fourth quarter of 2001 and the first three quarters of 2002. Three of those four quarters are already in, with two high productivity figures and one mediocre one.
If Greenspan knows more than we do about third-quarter GDP, preliminary figures for which are to be announced next week, he may feel on safe ground.
However, the key is not how the figures are "reported" but what they finally turn out to be after the 18-month revision process.
Judging by the sharp downward revision in GDP and productivity figures for the first three quarters of 2001, announced in July, we venture to predict that the final productivity figures for 2001-02 will be considerably less favorable -- and nowhere near a 30-year record.
Going forward, Greenspan raised a warning flag of doubt, prudent given the recent economic deterioration.
"Long-term productivity optimism ... may appear out of place in the months ahead should output per hour soften following this period of outsize gains."
This caveat may just indicate appropriate caution; it may also suggest that the third-quarter numbers announced next week will be poor compared with what we saw early in 2002, with a significant further weakening thereafter. We shall see.
Off the macroeconomic topic, there were a number of interesting presentations. Frank Lichtenberg, of the National Bureau of Economic Research, analyzed productivity gains in the drug sector, which in 1996 accounted for 16 percent of U.S. research and development.
His analysis showed that drugs approved by the U.S. Federal Drug Administration in 1983-96 reduced the number of people unable to work by 1.44 million and the number of work loss days per annum by 98.8 million, for a total economic gain of $53.2 billion per annum.
Further, these drugs increased mean lifespan by approximately 0.39 years (over and above other increases), which he claimed had a value per capita (assuming a $150,000 value of an extra year's lifespan) of $58,500. That looks a bit high to me.
Lichtenberg also claimed that new drugs had a further value in reducing hospitalization costs; this is clearly true but is obviously offset by other factors, given the soaring costs of healthcare as a whole.
George Halvorson, chairman and chief executive officer of Kaiser Permanente, discussed productivity in U.S. healthcare, in which studies have revealed that only 51 percent of patients receive the optimum treatment. Even in the health insurance sector, only 97 percent of claims are processed correctly, a defect rate that would not be acceptable at General Motors.
Halvorson agreed that the rise in healthcare costs was approaching crisis proportions. He recommended that the best way to reduce them was to adopt a system of automated medical records, on which a patient's entire medical history would be available to the doctor treating him, together with "best practice" recommendations for necessary tests and treatment.
A pilot study of such a system among heart patients in Ohio, over five years, halved mortality compared with a control group.
However, financial incentives in medicine now reward "care incidents," not cures. There is thus a great deal of structural work to be done on the healthcare system as a whole.
Dick Davidson, chairman and chief executive officer of Union Pacific Corp., gave an encouraging account of how his company had increased productivity by 6.5 percent per annum since the abolition of the Interstate Commerce Commission.
This gain had been achieved primarily by better management of rolling stock and track maintenance, through a high-tech nationwide command center in Omaha, Nebraska.
However, the start date for UP's productivity improvement was not 1995, but 1985. Wrong miracle!
