NCPA - National Center for Policy Analysis

Productivity Gains Outlook Remains Strong

February 15, 2001

Despite the prospect of a recession, the next five or 10 years are still likely to be among the best for American workers and consumers in 25 years -- as long as the late-1990s productivity growth wasn't a fluke. Productivity, the goods and services produced from each hour of work, is the magic elixir of economic progress.

  • Productivity grew at about 2.7 percent for a quarter-century after World War II.
  • Around 1973 it slowed mysteriously to about 1.5 percent, then perked up around 1995.
  • For the past few years, productivity has been growing at three percent or better.
  • Academic economists agree the boom had something to do with information technology -- they just can't agree on the details.

For example, among the least optimistic is Robert Gordon of Northwestern University, who doubts the Internet is as important an invention as air conditioning. He estimates only 0.4 or 0.5 percentage points of the recent annual productivity growth is lasting. Many of his peers, including those at the Fed, say it's twice that. But even Gordon's estimate is huge.

  • A half-percentage-point rise in productivity growth adds $1.2 trillion to the federal budget surplus over 10 years.
  • The same rise in productivity growth cuts the price tag for the 50-year fix to Social Security in half.

But will productivity growth hold up? Fed Chairman Alan Greenspan is optimistic because productivity growth stayed strong when the economy weakened, an unusual development. And Treasury Secretary Paul O'Neill adds, "If you look at the penetration of good ideas...we're still at the 20 percent to 30 percent level of what's possible."

Source: David Wessel, "The Magic Elixir of Productivity," Capital, Wall Street Journal, February 15, 2001.

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