What Those Dipping Productivity Numbers Mean

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Fear not, surplus-watchers.

Yes, productivity growth is one of the Big Three variables — along with economic growth and government spending — in those glorious 10-year surplus projections that make George W. Bush's $1.6 trillion tax cut possible to swallow fiscally. And yes, productivity growth slowed in the last quarter of 2000 to 2.4 percent, compared to a whopping 4.3 figure for 2000 overall.

But it's a temporary thing. Productivity growth is a simple calculation of output per worker, and with the economy slowing faster than unemployment is rising, the number's bound to go down when GNP growth hits the skids. And with economic growth likely to be close to zero for the first few months of 2001, the first-quarter productivity growth for 2001 will likely be even lower.

When this slowdown is over — and with the Fed cutting interest rates at a furious pace, the markets showing signs of life, and large parts of the economy showing surprising resiliency, it's not likely to last the year — productivity growth should go back on the uptick. And the linchpin of the New Economy will be back in force.

But watch out for labor costs

And even if this slowdown lasts for 10 years, 2.4 percent a year falls rather neatly into the Congressional Budget Office's admirably conservative economic projections that it plugs into its surplus forecasts. Heck, compared to the pre–New Economy years, before office technology and Internet efficiencies started to infiltrate Old Economy businesses, it's pretty darn good.

The more troubling number from the Labor Department's report Thursday may be labor costs. A key inflation gauge and one of Greenspan's personal bugaboos, they rose quite briskly to 4.1 percent in the same quarter, up from 3.2 percent in Q3. But that, too, is not something anybody's much worried about at the moment. Inflation is the least of our problems this spring.

Overall, the Bush White House can feel free to use Thursday's numbers as further evidence that a tax cut is needed, without shooting itself in the foot over surplus projections and fiscal responsibility. As Alan Greenspan told the Senate, productivity gains "show few signs of abating" and "should support growth of the economy over time."

In the meantime, we're in a temporary slowdown — maybe six months, maybe nine, maybe a recurring, malaria-type thing that happens every time a NASDAQ bubble bursts. But if the surplus projections turn sour a few years down the road, it'll likely be the politicians' fault.