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Businesses doing more with less

If you're looking for job growth to roar back soon, this should worry you: "Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek."

In other words, businesses have figured out how to do more with less -- or at least about as much with less. In the long-run, productivity gains are good for the economy. But in the short-term, the fact that businesses have been able to get this much extra work out of the workers they have reduces the need to replace the workers they've fired. It's a bit like the recession convincing someone to cut out their morning coffee only to learn that they don't really miss it. As they feel more economically secure, they may start buying coffee again, or they may spend that money elsewhere, or they may just continue to save it. There are advantages to all three choices, but what the economy really needs right now is one of the first two.

By Ezra Klein  |  March 31, 2010; 7:06 AM ET
Categories:  Economy  
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The Chicago Tribune wrote:

"For many decades, U.S. government securities have been the epitome of safe, dull investments. If you wanted to be absolutely positive you'd get your money back and then some, Treasury bills were the way to go. Right now, lots of Americans who put their money into big mortgages or stocks a decade ago wish they had gone the more mundane route.

But it's mundane no more. With federal budget deficits running wild, investors are growing uneasy at the idea of lending money to an institution that seems unable to stop spending beyond its means. Last month, something extraordinary happened: Two-year bonds offered by Berkshire Hathaway Inc. commanded lower yields than those offered by the U.S. government. As put it, "The bond market is saying that it's safer to lend to Warren Buffett than Barack Obama."

That may sound common-sensical — Buffett has experience at meeting payrolls, while Obama does not — but it's actually a surprising perception. Berkshire Hathaway, after all, conceivably could make so many mistakes that it runs out of money and closes down. But the U.S. government is not about to run out of money, even if it keeps overspending.

Why not? First, it can appropriate more of its citizens' earnings through the tax system. Second, and more important, it can print money to pay its bills. Warren Buffett doesn't have those options.

So it's hard to see why investors would be leery. Well, actually, it's not so hard: The federal government is digging itself deeper into debt every month and intends to keep doing so indefinitely.

The nonpartisan Congressional Budget Office offers a prognosis: "Under the president's budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020." Interest payments would quadruple.

The long-term problem here is not that the government eventually would default on its obligations. The danger is that it would create money to make those debts payable, a course that would lead to much higher inflation. Then, yields on even impeccable corporate bonds would climb with those of T-bills.

The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.

Frightened investors may be wrong to think they're less likely to get their money back from the government than from Buffett's Berkshire.

But they're not wrong to be frightened."

The current Administration is out of control, reckless, and irresponsible.

Obama is a disgrace.

Posted by: ignoranceisbliss | March 31, 2010 7:32 AM | Report abuse

Increased efficiencies are often the by-product of economic downturns. If you can't increase efficiency during the downturn, you're just as likely to go out of business. Businesses that can't do more with less tend to go away, so you're left primarily with the more efficient businesses. And they will be gun shy about hiring--if they weren't gun shy about how they spent their money, they wouldn't be in business anymore.

Eventually, they will hire, because more will need to be done than can be achieved through current productivity levels. But it's going to take a while.

Additionally, there is often an economic upside to wide scale unemployment, especially in America where it's easier to start a business, hire, and fire people than in many other countries: the unemployed start doing contract work to make ends meet. Some of them find they are good at it. Some find it can be spun into a business. Some find their business busy and profitable, and they need to buy stuff and start hiring. Then unemployment begins to shrink.

However, this is a multi-year process. It may show up in the numbers before 2012, but not before November of this year.

Posted by: Kevin_Willis | March 31, 2010 7:42 AM | Report abuse

"...In the long-run, productivity gains are good for the economy..."

I am really not sure this is true. This statement reminds me of the discredited Laffer curve, frankly -- a theory that's true at the very top and very bottom of its range, but not helpful at the middle.

This is the reverse -- in the midrange of the productivity curve, I suppose more efficiency is better.

But very high productivity ruins economies, by starving potential consumers of the income they need to purchase things. Lowering productivity would actually be better, by involving more people as workers, giving them paychecks to spend, and generally keeping them off the streets. Only at the extreme low end of the productivity curve, with everyone working but still not producing enough for their needs, does this bottom out.


Posted by: NoniMausa | March 31, 2010 8:11 AM | Report abuse

Productivity gains are great.

On the plus side for the jobs thesis, productivity growth the past several quarters is unsustainable. From 2009Q2-2009Q4, productivity grew at a 7.4% annualized pace. As much as I'd like to see China-esque productivity growth, I don't think we'll have elevated productivity growth for long. Another idea to consider is that firms fire their least productive employees and cut their least efficient business lines (and the most inefficient businesses go under) during downturns, which should inflate output per hour worked. As the recovery matures into sustained expansion, these workers end up getting hired back, depressing the output per hour statistics. For that matter, investment spending has been very weak, suggesting that it will become increasingly difficult to increase labor productivity.

If we get a strong expansion allowing production to rise at a 4%-5% annual pace and productivity growth settles down to the 1-2% annual pace that we experienced during the middle of the 2000s, we'll need hours worked to grow by 2%-4%/yr - if that pace can be maintained, we've made up all losses in roughly 3-4 years and we'll have something like full employment in 5-6 years. If we get a mediocre expansion or a double dip, well, it wouldn't matter much if productivity were soaring or not.

Posted by: justin84 | March 31, 2010 8:15 AM | Report abuse


It's a good thing that productivity gains weren't widely seen as bad 200 years ago during the time of the Luddites in England. Textile workers then were smashing mechanical looms because they created too much productivity and destroyed their jobs. If their views would have prevailed, then GDP per capita today would be closer to $1,000-$2,000 per head - low to us, but almost certainly in 'the middle of the range' for the people living at the time, since England was then one of the most productivite economies in the world.

There was enough income generated in the United States for people to have had their needs met 100 years ago if evenly distributed, but I think you would agree that productivity gains since that time have been a net plus for the economy and for us.

Productivity gains are never bad for an economy. Consumers as a whole can never be starved of income. If a worker is unemployed because of a productivity gain, it's not as if his formerly salary goes up in smoke - it is still with the business owner.

The business owner can then either hire workers in other areas, invest in expanding his business since the new labor saving technology has allowed him to sell his product for less and has sent the quantity demanded soaring, or keep it as profit and spend on goods/services from another business which will either need to hire workers or invest in capacity.

Productivity may seem high now, but 100 years from now our decendants will in all likelihood marvel at how poor the United States of 2010 was compared to how it will be in 2110. Even at a very modest pace of growth in GDP per capita of just 1.5%/yr, our ~$47,000 in GDP per capita will rise to $208,306 by 2110. An economy that rich could literally afford to give each citizen $25,000 as its 'welfare state' and it would cost less than our does today as proportion of the economy.

Posted by: justin84 | March 31, 2010 8:31 AM | Report abuse

All of the productivity gains of the last ten years is because of outsourcing jobs. It's the only reason. Thanks you bill clinton.

Posted by: obrier2 | March 31, 2010 8:59 AM | Report abuse

Hi Ezra,

I need to ask. Are these really productivity gains? That is, do the numbers take into account "offshore" workforce?

My company has increased "productivity", but that's by ramping up offshore IT.

Not sure if that actually counts as "productivity improvement with less $$$" or just "offshoring".


Posted by: JERiv | March 31, 2010 9:02 AM | Report abuse

@Noni: "I am really not sure this is true."

It is. In the long run, productivity gains are good for the economy. And, irrespective of your opinion of the Laffer curve (which is not an analogous comparison), it's difficult to debate that increases in productivity improve the economic prospects for everybody, while stagnation or decreases in productivity are damaging.

Increases in economic efficiency end up in less expensive products and services (or higher profits, which can then be reinvested in the business, or go buy expensive things for the evil businessman, thus employing the lowly yacht makers and fashion designers of the world). This--lower cost goods and services--gives people with less money greater access to those goods and services, which increases demands for those goods and services, and thus can increase demand for related or ancillary goods and services, thus creating new markets.

At the same time, increased efficiencies can free up capital, which can then be reinvested, or used to improve the standard of living for the folks who now spend less on less expensive products.

Increased efficiencies expand the great big pie of wealth. Money is a proxy for work done and products produced (which, again, is an outcome of work done, or labor). The more production, the more potential wealth there is. The less production, the less potential wealth. And, even if we don't want increased efficiencies, they will come. They will be necessary in economic downturns, and people will come up with ideas to increase efficiency so they can compete in an attractive market, even if the economy is good. Imposition of stagnant productivity, via regulation or unions, have limitations. The most common one is that, unless you refuse to trade with other nations, nations that do not hobble their car industries or steal industries with sweetheart union deals and oppressive regulations can provide product cheaper and more efficiently, and thus come to dominate the market.

BTW, the Laffer curve has not been discredited. And I'll tell you why. The only claim of the Laffer curve is that 0% taxation will being in zero revenue, and that 100% taxation will bring in zero revenue, so that the optimal tax rate for maximum revenue must be somewhere between 1% and 99% revenue. That's all the Laffer curve claims, and would imply (those does not explicitly state) that the optimal tax rate would be a flat 50%.

The Laffer curve predicts that lowering taxes may bring in more revenue if tax rates are very high. It also predicts that raising taxes may bring in more revenue if tax rates are very low. That's it.

Posted by: Kevin_Willis | March 31, 2010 9:02 AM | Report abuse

Oh, and btw, increased productivity usually equals increase burnout from the employees they're sucking that productivity out of.

So the 1 person who's now doing the job of 3 probably doesn't really appreciate the productivity gains.

It also means the companies that have those "productivity gains" are currently enjoying artificially low turnover rates, from employees desperate to leave who currently cannot due to the horrible job market.

You have to wonder, in the long run, are these gains really worth it if the top people in your company leave as soon as possible to avoid total burnout?

Posted by: JERiv | March 31, 2010 9:05 AM | Report abuse

Could some of these productivity gains be short term? I know that where I work there's been a hiring freeze for a few years, with no backfill of positions as people leave. Now, in the short term people are willing to work harder and longer, and get everything done. But eventually you're taxing the limits of what people are willing/able to do within a work week.

Posted by: MosBen | March 31, 2010 9:29 AM | Report abuse

@ JERiv: "You have to wonder, in the long run, are these gains really worth it if the top people in your company leave as soon as possible to avoid total burnout?"

Those aren't substantial productivity gains, in that they are temporary. Like spending on credit, it cannot be sustained, unless you are the government.

But simply working fewer people harder is not the only way to increase efficiency. In fact, it's the least efficient way to do so.

"It also means the companies that have those 'productivity gains' are currently enjoying artificially low turnover rates"

While certainly true, that won't be true forever. When it's not, those companies will either find it difficult to compete with companies that managed to increase real productivity and find real efficiencies (rather than abusing their workforce for all gains), or they will have to find a way to maintain productivity while simultaneously keeping their workers happy. And, if workers leave, they could either start their own companies (maybe applying knowledge regarding increasing productivity they picked up trying to perform their job) or take their skills to a company that has made real productivity gains, thus bringing valuable skills to the more-efficient company.

There is a such thing as being penny wise and pound foolish. Extracting efficiencies strictly by making existing people work harder is the least efficient way of improving productivity, and the most tenuous. Changing how the company operates, the layers of bureaucracy, devolving authority to the front lines, identifying new technologies, developing new technologies--these sorts of things make more meaningful improvements in productivity. Or, giving employees a stake in profits, thus "making" them work harder because it has an immediate impact on their own bottoms lines. That's also a good potential source of real productivity that requires that people work more, harder, better, and/or smarter, but is not simply enhanced productivity via slave-driving.

Posted by: Kevin_Willis | March 31, 2010 10:29 AM | Report abuse

@MosBen: "Could some of these productivity gains be short term?"

Yes. But not all of them.

"eventually you're taxing the limits of what people are willing/able to do within a work week."

That's survival mode, and it's important, too. But eventually those people can get other jobs (even in a down economy--my states unemployment rate is higher than the national average, and I managed to get another job in that sort of situation). But there will be real productivity gains, because only so much can be gained by working existing employees (who are often intransigent) harder and longer. And even if you are getting those advantages, you still have incentives to find additional efficiencies. Can an investment in an updated computer system save us an hour a day? Can upgrading out Internet connection allow us to process more orders or inquiries? And even individual workers who are over-taxed have a choice to give up their lunch hours and free time, or attempt to find a way to get the results they are responsible for more efficiently. There are real productivity enhancements (and real entrepreneurship opportunities) in an economic downturn, and those end up helping us out of that downturn. Even if it seems, at first, it's just going to perpetuate high unemployment rates.

The downsizing and rightsizing of the 80s helped to create the boom of the 90s (although there was, as it turned out, a lack of real efficiencies and productivity in the boom, but . . .). The downsizing of the 2007-2011 period may help lead to the next boom.

I find Ezra's stat a good sign, actually.

Posted by: Kevin_Willis | March 31, 2010 10:37 AM | Report abuse

ezra, this is just wrong.

as dean baker points out, productivity growth is not a good explanation for lack of job growth since there's always high productivity during recoveries - employment is a lagging indicator and economists have been talking about a jobless recovery, remember?

Posted by: boing3887 | March 31, 2010 12:53 PM | Report abuse

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