The Myth of American Productivity

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 Politicians say we have the most productive workers in the world. They don’t know what they’re talking about.

In 1939, when John Steinbeck completed The Grapes of Wrath—a heart-wrenching tale of a family of sharecroppers forced out of their home during the Depression— roughly one-quarter of the U.S. population still lived on farms. Today, family farms are increasingly rare, and less than 2 percent of employed Americans work in agriculture.

But rather than viewing the decline of farming jobs as a tragedy, economists almost invariably count agriculture as a shining American success—the triumph of productivity. And why not? A handful of farmers using GPS-equipped combines and sophisticated moisture sensors can grow far more food than the population of an entire rural county in 1939. Food has become so plentiful and cheap in the United States that it has been blamed for the increase in obesity. And agricultural products have become one of the country’s chief exports, totaling more than $115 billion in 2010.

As the story of the American economy is usually told, the shrinkage of agricultural employment was a tough but essential part of the march toward higher incomes and a better standard of living. What’s more, this example has been cited time and again to explain subsequent upheavals in employment. In 2003, N. Greg Mankiw, a Harvard economist who then headed President George W. Bush’s Council of Economic Advisers (CEA), told a Washington audience that the more recent fall in manufacturing jobs was an “inescapable” consequence of rapid productivity growth: “The long-term trends that we have recently seen in manufacturing mirror what we saw in agriculture a couple of generations ago.”

In a 2006 speech, University of Chicago professor Austan Goolsbee made the same point, explaining why the long-term decline in manufacturing jobs didn’t worry him. “Employment in the [manufacturing] sector and the share of spending in the sector get smaller and smaller almost as proof of how productive it has become,” said Goolsbee, then a top economic advisor to Senator Barack Obama and more recently CEA head under President Obama. “It is exactly the same process that agriculture went through.”

Numerous statistics would appear to confirm Mankiw and Goolsbee’s analogy. Manufacturing employment in the U.S. is on a long downward trend, with no sign of a rebound. Despite the supposed recovery, companies are still announcing factory shutdowns and consolidations. One example: in Fort Smith, Arkansas, a Whirlpool refrigerator plant currently employing about 1,000 workers will close its doors by the middle of 2012.

Nevertheless, these ever-fewer workers seem to be producing ever-larger quantities of manufactured goods, such as electronics, aircraft, medical equipment, and chemicals. According to the Bureau of Economic Analysis, American manufacturing output was 16 percent higher in 2010 than it was a decade earlier, despite the devastating impact of the Great Recession and the virtual disappearance of some manufacturing industries. Combined with the sharp plunge in employment, the BEA statistics imply that manufacturing productivity rose by a stunning 74 percent from 2000 to 2010. Companies that distribute and sell these goods, like Walmart and Best Buy, also seem to be enjoying sizable efficiency gains. According to government data, wholesale and retail trade companies have seen a 20 percent increase in productivity since 2000, as information technology and the Internet enables them to deliver more goods with fewer people.

These statistics undergird one of the chief messages of reassurance that has been repeated throughout the economic crisis: yes, factories may be closing, and whole domestic industries may be withering left and right, but Americans should take heart because we have the “most productive” workers in the world. This refrain has been voiced to the American people by everyone from Barack Obama to Mitt Romney, from Richard Trumka, president of the AFL-CIO, to Tom Donohue, head of the U.S. Chamber of Commerce.

Whenever leaders and economists cite this reported strength in productivity—and the historical precedent of agriculture—they are advancing a certain basic theory of our current situation. The U.S. economy is fundamentally sound, the theory goes, and could create broad prosperity if only Washington made some targeted policy interventions. (The nature of the proposed quick fix—stimulus money or tax cuts—varies according to party affiliation.) After all, if the analogy to agriculture holds true, then rising productivity in the manufacturing and distributive sectors should eventually pay off in higher real wages and higher living standards for Americans. Today’s high poverty and unemployment rates will only be part of a painful but temporary period of disruption, as exports of manufactured goods increase and unemployed workers are gradually absorbed into other sectors of the economy, just as an entire generation of farmworkers moved north and west to work in factories.

There are two big problems with this theory, however. One is that the analogy between agriculture and manufacturing is profoundly misleading. The gains in agricultural productivity that transformed this country in the twentieth century are fundamentally different from the gains in manufacturing and distributive productivity we are seeing today. The other, related problem is that our bullish measures of productivity suffer from an enormous statistical blind spot. Rather than wait for rising productivity to save the day—and relying on economic policies that are essentially complacent—the U.S. needs to adopt drastic measures if it wants to keep living standards from falling.

Consider, for a moment, what a farmer has to do to improve the yield of a corn or wheat field in Kansas or Nebraska. Machinery has to be purchased to plant and harvest the crops. Pesticides and herbicides have to be applied to fight bugs and weeds. Irrigation has to be used appropriately to make sure the crops mature as desired.

In a very real sense, agricultural productivity is intrinsically rooted in American soil. Yes, the tractor might be imported from Japan. But a farmer cannot plant crops in Iowa and then outsource the harvesting to Vietnam. Pesticides have to be sprayed on American bugs, and crops have to be irrigated with American water. Most of the value created by agriculture is made in America.

By contrast, most manufactured goods these days are the product of global supply chains, which may include multiple countries and border crossings. Your smartphone, for example, is assembled from components that were manufactured all over the world. On a less high-tech note, the cedar hangers that organically keep your suits and dresses free of pests may be made of wood grown in the U.S., shipped to China for manufacture, and then shipped back to the U.S. again.

Given the dominance of global supply chains, manufacturers and distributers both have two very different strategies available to them for cutting costs. On the one hand, they can invest in raising productivity in their domestic operations. A midwestern auto factory can rearrange its assembly line to produce more cars with fewer workers; a retailer can shift more sales to its online division; a real estate agency can invest in contact-management software to help fewer brokers manage more potential buyers and sellers.

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The Myth of American Productivity

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