AMERICAN PRODUCTIVITY lurched downward last spring, and the statistics set off new ripples of anxiety about the economic future. This latest drop is the result of the recession, but it follows a decade of deteriorating performance. When labor productivity does not rise -- and it hasn't risen for several years --a wage increase for anyone is inflationary unless it's balanced by a wage cut for someone else. Only a rise in productivity can generate wage increases that are not inflationary. Until productivity begins to grow again, the prospects for controlling inflation will remain poor.
What can public policy do to induce higher productivity? The debate is currently focused on tax incentives for investment. The right kind of tax cut would make an important contribution. But it's not enough. Even greater investment could raise productivity only slowly -- perhaps one-tenth or two-tenths of a percentage point a year. Sustained over a number of years, that could build up to an impressive improvement. But it won't happen quickly or dramatically.
There are other factors that affect productivity even more strongly than business investment. No one knows in complete and exact detail what makes a country's economy more productive or why American productivity has now gone flat. But it's possible to identify the things that matter most. The economist Edward F. Denison of the Department of Commerce has published studies of American development since the 1930s, pointing to several crucial determinants. Education is a major contributor; without the rapid rise in educational levels in the past two decades, economic performance would have been much worse. Technology counts heavily. On that point, it's worth considering extending the investment tax credit to industrial research and development. There's no magic in spending more dollars on production equipment if the equipment is obsolete.
Expansion of markets is necessary. That's the reason for plunging more deeply into world trade, despite the impact of imports on some American industries. Labor has to keep moving. Up through the 1960s, American productivity was lifted steadily by the migration from farms into factories. That migration has now ended, and similar gains in the future depend on shifting labor from less efficient industries into more efficient ones. That's hard for the government to do. In the Chrysler case, it did just the opposite, shoring up a collapsing company to avoid pushing people out.
Productivity is merely a number that reflects the efficiency and sophistication of an economy as a whole. Cutting taxes to stimulate investment is one of the most immediate things to be done. But as candidates talk about it, voters might remember that the tax cut only begins the job of pushing up productivity -- and, much the same thing, the country's standard of living.