August 30, 2005


The Unnoticed Statistic (Michael Mandel, 8/29/05, Business Week: Economics Unbound)

[R]ising MFP [multifactor productivity] is like free money--you get added output without having to invest more. An economy with fast-growing MFP will over the long-run always beat one with low-growth MFP.

I didn't see it at the time, but in June the Bureau of Labor Statistics issued early estimates of MFP for 2003 and 2004--and the results were spectacular. According to their numbers, MFP growth was 3.1% in 2003 and 3.3% in 2004.

To put these results in perspective, this was the first time MFP growth had topped 3% since 1976. And it was the first time since the mid-sixties that the U.S. had had two straight years of plus 3% MFP growth.

If MFP keeps rising at this rate--if Americans keep finding ways to work smarter and to advantage of new technology--then the trade and budget deficits are fairly irrelevant.

The Budget's Misguided Parsimony (Michael Mandel, 2/14/05, Business Week)
Of course, right now you're asking: What the heck is multifactor productivity, and why is it so important? MFP is the lesser-known cousin of labor productivity, which is the amount of output that an average worker can produce in an hour. So, for example, if you're digging ditches, your labor productivity is the number of feet of ditches you can dig in an hour.

A rise in labor productivity can happen for a lot of different reasons. Workers can have more and better machinery and equipment to use -- say, a backhoe rather than a shovel, to move dirt. Or the workers can become better trained in using the equipment they already have. In either case, the increase in labor productivity carries a cost: the price of the backhoe or the expense of training the worker.

Multifactor productivity measures something different. When MFP rises, it means output per hour of the average worker goes up without any additional skills or education or a change in equipment. An increase in MFP equals free money, extra production that you don't have pay for.

Multifactor productivity is borne of the essence of technological innovation -- the creation of new products and new opportunities out of ideas and thin air. For example, the spread of the Internet has not only made doing business easier and cheaper but also allowed people to do things that weren't even possible in the past. Think about Amazon (AMZN ), Google (GOOG ), and eBay (EBAY ). Wireless phones aren't just a substitute for landlines; they enable people to organize their activities in very different ways.

The rate of multifactor productivity growth represents the single best indicator of the economy's true strength. When MFP is increasing rapidly, the size of the economic pie expands, real wages rise, profits go up, and everyone feels good. When that figure stagnates, things are tough all around.

For example, multifactor productivity didn't rise at all in 1973-83, a period that included the era of runaway inflation, President Jimmy Carter's famous "malaise" speech, and the deepest recession since the Great Depression. During that stretch, the stock market, adjusted for inflation, fell by 34%, while real hourly wages for production and nonsupervisory workers descended by 11%.

By contrast, the birth of the New Economy can be clearly seen in the sharp acceleration of multifactor productivity growth starting in 1996. From that point to 2002 (the latest year for which figures are available), MFP gained a bit more than 1% a year. From 1995 to today, real wages have risen by 9%, while the inflation-adjusted stock market is up by 68%.

An economy with rapid multifactor productivity growth is potentially quite profitable for investors, which helps explain why the U.S. can attract so much foreign capital to fund its trade deficit. High MFP also generates lots of extra output, useful for paying for, say, military actions or better health-care benefits. It's like having a cushion or a security blanket.

This all has to be false. We know, because we're frequently told, that life was never better than at the apogee of liberalism and that life for the average American began its long decline when Ronald Reagan brought conservatism to power and has sunk rapidly into the slough of despond under George W. Bush and the dictatorship of the plutocrats.

Posted by Orrin Judd at August 30, 2005 3:14 PM

The Left can's see the truth of this development because it is captivated by materialism. MFP rises because the moral amd mental potential of people can be applied to reduce the friction of making and doing productive things, as well as developing better habits and better ideas which are inherently valuable. It isn't a question of stuff. But if all you account for is stuff, then you can't explain the phenomena and just ignore it.

Posted by: Luciferous at August 30, 2005 4:45 PM

The key to this kind of growth is the adaptibility which comes with free enterprise. Anything which allows resources to move to where they will do the most good furthers this, anything which retards flexibity, such as life support for outdated technology, detracts from it.

To borrow a concept from tactics, as was said about German mission tactics, you never knew hat they were going to do, but you knew it would be tough. Free enterprise works like that.

Now when we compute the costs of multifactor productivity growth, we find both material and non-material costs. Persons who fail to adapt, who neglect education, spurn technology, of who just resist moving to a location of higher demand for their labor are disadvantaged. The alternative to their discontent would be for the rest of us to bankroll their lassitude and nostalgia, thus increasing the cost of adaptation for the sake of non-adaptation. This is why we say that so-called "progressive" economics are actually counter-progressive.

This is right out of Herbert Spencer, BTW.

Posted by: Lou Gots at August 30, 2005 7:07 PM

I've looked at the BLS report containing the referenced estimates, and while the methodology seems plausible, I personally wouldn't hang my hat on those estimates. It seems like a remarkable coincidence that just when they try something new, MFP just happens to be much higher than it has been in decades. I'm waiting another year to see what the 2003 MFP actually ends up being before buying into future estimates.

I do hope it's right though.

Posted by: Bret at August 31, 2005 1:48 AM