Economic Development and Government

Where's the productivity?

May 15, 2013
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What's the economic state of the Union?
President Obama delivers his State of the Union address in the House Chamber at the Capitol. Photo via fb.com

In spite of headlines pointing to emerging signs of recovery, the economy continues to perform poorly. Jobs and hours worked are a poor guide to the economy’s health. More important is productivity, which determines living standards.

Historically, U.S. productivity growth has averaged 2.2 percent a year. At this pace, living standards double every 33 years.

Whenever the U.S. has abandoned free market, classical economic principles, productivity growth has slowed. When it restores those principles, productivity improves.

Reagan v. Obama

In the 15 quarters of the recovery under President Reagan, annual productivity growth was 2.3 percent.

In the 15 quarters of the recovery under President Obama, productivity growth has averaged 0.6 percent.

At the rate experienced under President Reagan, living standards would double in 31 years.

Under the most recent rate, it would take 111 years to double living standards.

More hours worked in 1997

As for hours worked, they are improving. Even so, they remain below the total number of hours worked in 1997. Yes, we are working fewer hours today than we did 16 years ago. 

The potential hours worked is based on the growth of the working-age population. Today, the total number of hours worked is 15 percent below this potential.

When the economy is performing well, both productivity and hours worked are increasing.

This was the case during both the Reagan recovery and under President Clinton from 1995-2000. There was a sharp slowdown in the growth in federal spending during both of these periods.

Productivity in exchange for hours worked

In contrast, the U.S. economy was able to register gains in productivity early in the last decade only by sharply reducing the number of hours worked.

Recently, as the number of hours worked has been increasing, productivity growth has suffered.

Companies have been able to maintain profits, because they have cut wages and payrolls to improve productivity and maintain profitability.  

As a result of these moves, the massive expansion in federal government programs has been paid for by workers who are either without jobs or poorly paid.

The U.S. workforce has paid dearly for the nation’s latest experiment with “progressive” policies.

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