Economists are like doctors. In the past 30 years, they have made vast strides in understanding, but many of the most basic problems remain shrouded in ignorance.
Nothing makes this clearer than the enigmatic subject of productivity. You cannot easily have missed the mass moaning about the falloff in productivity growth. In the last decade, productivity -- generally defined as output per hour worked -- has advanced at a snail's pace: about 1.6 percent annually against 3.2 percent between 1947 and 1967.
But we have only a curde understanding of what caused this decline and an even cruder idea of how to cure it. And the partial answer we have in not a popular one: Increase investment.
As a practical matter, that means increasing business profits, which is one way to prod companies to take more risks and start more research. But, at best, Congress is likely to tiptoe toward that solution, and even if it is the correct step, higher productivity growth might not result instantly. Cause and effect are linked imperfectly, and low productivity growth could persist for years.
For most laymen, of course, productivity remains an obscure productivity remains an obscure abstraction -- and understandably so. The most spectacular leaps in productivity involve technological adnances far removed from the average employe's work habits. But you cannot understand the economy's cycle of frustration unless you understand productivity, for it is the ultimate source of rising living standards.
Start with those technological leaps.Faster and larger jet aircraft have reduced the real price of air travel to about half what it was in 1950s. The telephone company's latest switching machine handles 150 calls a second (550,000 an hour) -- four times as many as its predecessor. Today about 4 percent of the population is engaged in farming, but it produces more food than 16 percent of the population did 30 years ago, mainly as a result of mechanization and changes in plant and animal breeding and feeding.
Collectively, advances like these have enabled Americans to consume more without working more. At the same time, productivity growth also muted inflation. In the 1960s, when productivity was rising at about 3 percent annually, it was possible for employers to grant 4 percent wage increases with only about a one percent inflation rate. Heigher productivity offset most of the higher wages.
But now, with low productivity gains, we are locked in a vicious wage-price spiral with very little gain in real living standards. Not coincidentally, median family income (adjusted for inflation) advanced about one-third in the 1960s but has increased only about 11 percent in the last decade.
To some extent, the falloff in productivity growth reflects restricted definition: what we mean by productivity and our standard of living. Mopre and more investment, for example, now is diverted into uses that for the purposes of economic statistics are nonproductive, that is, for pollution abatements and worker safety.
These multi-billion-dollar sums produce nothing that can be bought. If we could somehow include cleaner water and air or less hazardous working conditions as income, we might see that our living standards have improved more than we imaged. Otherwise, they represented a large drag on measured productivity -- perhaps 0.5 percent annually, according to Edward F. Denison of the Brookings Institution.
Part of the productivity decline also may reflect the changing composition of the economy's output. Until the late 1960s, the country benefited from a steady stream of workers from marginal farm jobs into more productive office and factory jobs. That shift -- and with it, an extra source of productivity growth -- virtually has come to an end.
Equally important has been the expansion of government and nonprofit institutions such as universites, hospitals and foundations. In 1947, this sector employed less than 12 percent of the labor force; by 1977, that proportion had grown to 21.5 percent. If this change has spawned a better-educated, bettermotivated work force -- and that is not clear -- it may have contributed indirectly to a more productive society. But, in the short run, this sector adds little to productivity. sector adds little to productivity. We have more teachers, but do we have better-educated students? More surgery, but healthier citizens? More police, but safer streets? In productivity calculations, government is simply excluded.
The growth of this public and semipublic sector puts more pressure on private business to cough up the added productivity needed to produce all the private goods and services that we want to consume along with the public goods. Its inability to do so in part has caused the "tax revolt." Given a choice between public and private goods, people are saying that they want fewer public goods. In effect, they may be compensating for the extra public goods -- lower air and water pollution, etc. -- forced on business.
What we do not know is why the private economy's productivity has slipped. There are theories galore. By one, the rise in energy prices has made labor cheaper and capital investment -- which consumes energy -- more expensive; therefore, we have less new investment. By another, the influx of inexperienced young workers into the labor force has hurt productivity.
The more we examine these maters, the less we seem to know. The Council on Wage and Price Stability recently studied various industries and found that the construction industry had suffered large declines in productivity. But the reasons for the falloff remain unclear.
We do dnow that the productivity decline has coincided with a period of lackluster investment, just when investment (compensating for federally mandated requirements) ought to be higher. With more raped inflation, more risk of recession and a generally more unstable world, we may have entered an era that naturally discourges investment. We face the choice of trying to stimulate more investment or accommodating ourselves to a future of lower expectations.
Or maybe both.