Workplace Special: the Productivity Debate

The legendary English economist John Maynard Keynes once forecast that by the end of the 20th century, advances in technology would make us more productive workers, turning our greatest challenge into how to fill our leisure time with meaningful activities.

Keynes may have been wrong about that, but more recently, hopeful technologists and economic observers have followed in his footsteps by crediting computers and information technology for the massive economic gains and increases in productivity in the 1990s.

In its simplest form, the concept of productivity itself boils down to two essential elements: the value of goods produced divided by the number of hours worked. Computers, according to some observers, allow businesses to produce goods more quickly and efficiently.

And in theory, this increased productivity should mean that Americans are free to work shorter and shorter hours while accumulating the same wealth. But in reality, work weeks are as long as ever.

So have computers really made us more productive? And if so, why haven't they given us with more free time?

Workers Find Productivity Paradoxes

Those are just two questions being asked in an ongoing debate about computers and productivity among academics and economists that is as highly abstract as it is contentious. But make no mistake about it, the productivity debate has a direct bearing on economic forecasting, and could end up having an impact on your pocketbook.

Greenspan: A Permanent Revolution

On one side of the argument are those, most notably Federal Reserve Chairman Alan Greenspan, who believe that computers have helped foster an information revolution in the business world and fundamentally changed the way firms operate.

"Knowledge is essentially irreversible," Greenspan said last year, "so much — if not most — of the recent gains in productivity appear permanent." And in congressional testimony, Greenspan has spoken of "a remarkable run of economic growth that appears to have its roots in ongoing advances in technology."

Economic statistics, which show that America's productivity rate has soared since 1995 — a halcyon year for the expansion of the Internet — seem to back up the idea that technology lies behind the U.S. economic boom of the last decade.

But others disagree. Robert J. Gordon, an economics professor at Northwestern University, claims that when it comes to being more productive, the only thing computers have done is to help people make more computers quicker and more cheaply.

"There has been no productivity growth in the 99 percent of the economy located outside the sector which manufactures computer hardware," Gordon has argued.

Efficiency or Uncounted Hours?

Greenspan, however, believes that computers have helped business efficiency by allowing companies to streamline their operations and keep closer track of their inventories. That means they can distribute their goods more efficiently and avoid making excessive amounts of their products.

For this reason, the Fed chief argues, computers have helped pump up a productivity rate that once flourished in postwar America, then sagged along with the rest of the economy.

From 1947 until 1973, productivity increased at an annual rate of 2.9 percent. In the relatively lean years that followed, until 1995, productivity grew at an annual rate of just 1.4 percent. But it rocketed back to an average of 2.9 percent in the heady years from early 1995 until the first quarter of 2000.

But some economic observers have argued that the statistics are much less clear than Greenspan thinks, and point to some examples — like Internet infrastructure provider Cisco's recent announcement of $2.5 billion in surplus inventories — as evidence contradicting his thesis.

Skeptics of the effect of computers on productivity also say Greenspan has focused too narrowly on the corporate sector, and that similar increases of productivity have taken place in prior decades, without the help of computer technology.

And Stephen Roach, chief economist at Morgan Stanley Dean Witter, has argued at length that America's work force is putting in a significant number of uncounted hours on the job, making the increase in productivity a mirage.

Your Tax Cut

All of this is no idle area of discussion: Productivity estimates are tied to the most practical matters concerning economics and personal finance.

For instance, the current government budget surplus estimate of $5.6 trillion over the next decade is based on the assumption that productivity will remain high — at an annual rate of up to 2.5 percent — over the next 10 years. High productivity means more revenue for America's companies, and thus more tax money lining the government's coffers.

Productivity and Taxes

President Bush, among other Republicans, routinely cites the $5.6 trillion figure when arguing that his $1.6 trillion tax-cut plan is affordable. But Democrats say the number is only a rough estimate, and could change drastically if productivity and growth level off.

In the meantime, the productivity debate continues, much to the disappointment of those who say the evidence on hand barely begins to tell the story.

"In some ways I'm just amazed that there's even a debate," says Ed Yardeni, chief economist at Deutsche Bank in New York, and a firm believer that computers are beginning to bring widespread changes to the business world. "We're still just scratching the surface of what technology can do."

Next: Productivity Paradoxes

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