Chimerine, Lawrence

English

Research Papers in Economics

OUR #1  NATIONAL  ECONOMIC  PRIORITY:
AN  "INVESTMENT  ECONOMICS"
TO BOOST PRODUCTIVITY
Lawrence Chimerine
Wharton Econometric Forecasting  Associates
The top economic priority for the rest of this century  must be to
accelerate  the underlying  trend in productivity  growth from the dis-
mal performance  of the  last fifteen  years.  Productivity  grew by  an
average of nearly 3  percent per year  in the 1950s,  1960s and early
1970s;  since  1973,  it has decelerated  to an annual average  of less
than 1 percent.  As a result, average  productivity is now  over 20 per-
cent less than it would have been had the previous trend continued.
Many Reasons  for Near Stagnation
Many  explanations  have  been  offered  for this near  stagnation  in
economic efficiency,  but the obvious conclusion from the research
that I and many others have done in recent years is that no single
factor,  such as shifting  demographics  or any other relatively  uncon-
trollable  factor,  is responsible.  Rather,  the evidence  suggests  that a
multitude of factors, each making a relatively  small contribution,  are
at fault.
These factors include  1) the need to absorb large numbers  of rela-
tively inexperienced  new entrants into the labor force;  2) an increas-
ing share of business  investment going toward  energy conservation,
environmental  needs,  and  other  relatively  unproductive  (although
perhaps  necessary)  activities  and  needs;  3)  declining  research  and
development;  4) a substantial reduction in invested capital per work-
er; 5) a shifting mix away from relatively high productivity  sectors to-
ward those  with  lower  average  productivity;  6)  a  reduced focus  on
the importance  of manufacturing;  etc.
Most  disturbing  is that  overall  productivity  growth  has  remained
sluggish  in recent years  despite many favorable  factors,  such as de-
clining  oil prices,  the relatively  long  period of  economic  expansion
and the large amount of idle resources when the recovery began.
9Results of Slowdown
The dramatic  slowdown in productivity growth is the root cause
behind the  major  economic  developments  during  the last  fifteen
years.
First, the competitive  position  of the  United  States in world  mar-
kets has declined  dramatically  since the early  1970s,  causing sharp
declines  in the U.S.  share of worldwide  production in most indus-
tries; gigantic  trade  deficits  after  many years of surpluses;  and,  our
shift from being the world's largest creditor to its largest debtor in a
matter  of a few short years.  This change  in relative  competitiveness
primarily  reflects  a  shrinking  of U.S.  advantages  in  technology,
product quality  and,  mostly,  productivity.  In industry after industry,
the gap in these  areas has been narrowed  by foreign  competitors-
in  some  cases  U.S.  companies have  actually  fallen  behind.  And,
most significantly,  the  slow  growth  in productivity  in the  United
States made it relatively  easy for foreign competitors to catch up.
Second, and directly related,  real wages have essentially  stagnated
since the early 1970s,  following an average  annual post-war increase
of 2.5 percent  until then.  Although  partly due  to oil-caused  inflation
in the  1970s,  the  major  factors  have been the widespread  wage re-
straint and the loss of many high-paying jobs (while most of the new-
ly created jobs are lower-paying)  that resulted from  sluggish produc-
tivity  growth  and  deteriorating  competitiveness.  This  slowdown  in
real  wages has meant that an increasing  number of families have
had to rely on a second income, cutting  savings and/or going deeper
into debt in order to improve  or just maintain their living standards.
Reversing  the Trend
A substantial  acceleration  in productivity  growth  is essential  if
these trends are to be reversed,  if the tradition  of rising real wages
and living standards  in this  country is  to be restored  and if the cur-
rent expansion-partly  created by a massive  debt buildup  and by
rising labor force participation rates-is to be continued.  Higher pro-
ductivity is also necessary  if we  are to address the enormous  unmet
needs that have been building,  such  as dealing  with the drug prob-
lem, finding a cure for AIDS, etc.-only in a more productive  society
can we have the resources to meet these needs.
This,  in my view, will require a major national effort.  Unfortunate-
ly,  the opposite  seems to be occurring-not only are these unfavora-
ble trends not receiving adequate  attention, but,  if anything, a sense
of complacency  seems to have  developed  because  of the  decline  in
the trade deficit since early  1988.  However,  the trade turnaround
has been small at best, and  is primarily due  to the weak dollar and
cost cutting  in U.S.  industry (and thus is occurring  at the expense of
living standards)  rather  than reflecting  any major  change  in funda-
mental competitiveness.  Without such a change,  real wage gains will
10continue  to be  weak,  or nonexistent,  at a time  when  an  increasing
share  of U.S.  incomes  will  be needed  to service  the enormous  and
still growing foreign debt-this combination would further jeopar-
dize living standards in the future.
What is particularly disturbing is that the growth in manufacturing
productivity  has begun  to slow  in the  last two  years,  following  a
surge  in the  mid-1980s.  But  this  is not  surprising  since  the  early
surge  partly  reflected  widespread  outsourcing  of various job func-
tions (and thus was not accompanied by  a significant  acceleration  in
economy-wide productivity growth), as well as many one-time factors
such as plant closings  and corporate  staff layoffs,  rather than  on-
going improvements  in manufacturing  efficiency.  What  is needed  is
a sustained  period of accelerated  growth in productivity,  not just
one-time  adjustments,  especially  since  the  gains  in  efficiency  in
many of the countries  with which we compete  still exceed that being
experienced  in this country.  And,  since  the basic factors  that influ-
ence long-term productivity are not improving,  this is not likely to
take place unless major changes  in government  policies,  and in our
priorities as a nation, are implemented.
Boosting  Productivity
That  is why  I and a number of colleagues at Rebuild  America,  in-
cluding Nobel Laureate  Robert Solow,  recently proposed  a compre-
hensive strategy to boost productivity through increased private and
public investment  in physical and human capital.  Essentially,  we be-
lieve  the  only  clear  way to  produce  the  sustainable,  ongoing in-
creases in productivity  that are needed is to  1) increase our basic re-
search,  2)  embody  new technology  more quickly  in our production
facilities  through  a higher  investment  rate and  a more long-term
focus, and 3) educate and train our workers more effectively.
Federal Focus  Required
Unfortunately,  recent  evidence  suggests  that  without  a
government-led  national  focus,  adequate  improvements  may  not
take place,  especially since the solutions, like the causes,  must be
multidimensional.  Washington  must play  an important  role in the
process  by mobilizing the  private and  public sectors  on behalf of
such an "investment  economics" that  1) raises the national saving
rate,  2) provides tax incentives  for productive private investment and
3) boosts public investment  in the workforce and cutting-edge  indus-
tries of the 1990s.
Specifically,  Washington  should:
1.  Set  goals  for  savings,  investment,  research  and development,
educational  quality,  etc.;
2.  Focus attention on the importance  of productivity in every seg-
11ment of the economy and help create an environment that favors
real investment over speculation and financial transactions  and
moves us away from an excessive  short-term focus toward a more
long-term orientation.
3.  And,  most of all,  promote  policies that create  the best possible
business environment by:
*  Reducing  the budget deficit  in order  to  increase  national
savings.
*  Developing  policies  to ensure  that the  resulting  increase  in  na-
tional savings is used wisely; e.g.,  for more productive invest-
ment and more research and development by the private sector.
*  Adjusting  spending  priorities  and  the tax  structure  to  promote
future investment and growth.
*  Bringing  industry,  government,  labor and  universities  together
for  joint research  and  other  cooperative  efforts  when
appropriate.
*  Forging  government-business  alliances  to  address  specific  eco-
nomic problems.
*  Reducing  Less Developed  Country (LDC) debt to make those
countries viable markets for U.S.  products again.
*  Being  more  forceful  in opening up foreign markets  to  U.S.
goods.
*  Reversing  the declining quality  of education,  especially in math-
ematics  and science,  in order to increase  the  skill  levels of the
labor force.
The Future
Much  time has already been lost-the next administration  must
begin  to address these  issues as  soon as  possible and give  them the
highest priority during the next few years, or the next generation,
and those that follow,  may suffer the consequences  in the form of
stagnant, or even declining,  living standards.
12

OUR #1 NATIONAL ECONOMIC PRIORITY: AN "INVESTMENT ECONOMICS" TO BOOST PRODUCTIVITY

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Research Papers in Economics