July 8, 2004
YOU DON'T GET PAID MORE FOR MAKING EVERYTHING CHEAPER:
The Good News About Productivity (Arnold Kling, 7/08/04, Tech Central Station)
"This story of positive structural changes in the American economy -- the very rapid growth of potential output -- is the big story about the economy during the past four years. It's important both at the macro level -- why is output-per-man-hour 20 percent higher than it was five years ago? -- and at the micro level -- how are people today doing their jobs and being 30 percent more productive than their predecessors of a decade ago? The news media aren't covering this well. Yet it's the really big story about the economy in the Twenty-First century." -- Brad DeLongProductivity is probably the single most important economic statistic. Productivity is what determines our standard of living. In the long run, productivity is what determines how much workers are paid.
(In the short run, wage growth sometimes diverges from productivity growth. If there is a sudden surge in productivity, it usually takes a couple of years for this increase to work its way into wages. Conversely, if there is a productivity growth slowdown, as in the 1970's, it takes a while for wage growth to slow down to match.)
Sustained high productivity growth would cancel out any possible economic worry. Global competition from low-wage workers? High productivity would protect our standard of living. Rising costs from Medicare? As I pointed out in The Great Race, high productivity would make the welfare state affordable (although not optimal). Environmental quality? High productivity would give us the resources to devote to addressing any challenge. On the other hand, low productivity growth would mean that our incomes will be low, our tax burden to pay for entitlements will be high, and environmental issues will be much harder to address.
When a similar productivity boom occurred in the U.S. between 1870 and 1900 it led to a period of healthy deflation with wholesale prices falling 1.5% annually. It's a fool's errand to look for wage growth. Posted by Orrin Judd at July 8, 2004 5:08 PM
What's the difference?
Posted by: Jeff Guinn at July 8, 2004 5:27 PMExactly. Falling prices are an effective wage hike.
Posted by: oj at July 8, 2004 6:27 PMIt's more complicated than that.
Few things have experienced greater productivity gains than corn, but corn farmers are not doing so hot.
Posted by: Harry Eagar at July 8, 2004 9:10 PMIf you're a corn farmer, everything doesn't get cheaper.
And, sometimes you do get paid more. Henry Ford and his workers did.
Posted by: Harry Eagar at July 9, 2004 2:55 AMHarry:
Read a book--there was deflation during the Depression, which meant everything got cheaper. It just happened to be bad deflation because caused by poor decision making at the Fed in Congress and by Hoover and FDR.
Posted by: oj at July 9, 2004 8:40 AMHarry--
The point of higher productivity in, say corn, is that it requires fewer acres to grow as much corn. In the very short run, this depresses the price of corn a lot due to oversupply and makes some farmers worse off. (Others do well or run in place, depending on how their personal productivity improvements compare to the industry as a whole and the price movements.) In the longer run, fewer farmers make corn, and while prices are still lower for corn, the income for farmers (and everybody else in the country) becomes higher due to higher productivity.
The whole point is that we have not achieved Utopia, same as always. Even if we had, then people would still want more leisure time. Rising productivity always lifts all boats, in the medium and long term.
Posted by: John Thacker at July 9, 2004 10:51 AMExcept that isn't what happened to the corn farmers.
Their inputs did not deflate. In particular, land did not go down. It went up.
There also are threshhold problems.
These are kind of hard to tease out. The capital base needed to create a quarter-section farm on the Iowa prairie was around $50K in 1860, though land was available to be patented at $1.25.
I don't know how much you'd need today, but to start with, you'd need a whole lot more land. There aren't many 160-acre farms left in the Corn Belt.
Posted by: Harry Eagar at July 9, 2004 6:08 PMBecause they're inefficient and can't produce enough at the ever cheaper prices.
Not many blacksmiths either I bet.
Posted by: oj at July 9, 2004 6:28 PMImmigration, then and now, pushes down wages, robbing people of the benefits of price deflation.
Posted by: John Doe at July 10, 2004 7:36 PMYes, hard to believe we've survived 400 years of open immigration.
Posted by: oj at July 10, 2004 7:57 PMSmall corn farms are not inefficient, Orrin. Wheat is a better example. European wheat farms are 2.5 times as productive, per acre, as Kansas wheat farms. (Another example of their decadence, I suppose.)
It's true that it takes a lot more output to support one farmer than it used to. This is great for corn consumers.
It's the old trade made by the Anti-Corn Law League and again by Reagan -- cheap food for the cities, to hell with the countryside.
Great politics, until something bad happens and you need the countryside again.
Posted by: Harry Eagar at July 11, 2004 3:28 PMOne never does.
Posted by: oj at July 11, 2004 3:33 PMOnly if you want to eat. The English came within 3 weeks of starving because they had dumped the Corn Laws.
They didn't save themselves, either. We saved 'em.
The Japanese, without us as friends, did starve.
Posted by: Harry Eagar at July 12, 2004 2:39 PMYes, we're teetering on the brink of famine.
Posted by: oj at July 12, 2004 2:47 PM