Productivity underpins our economic strength, and our economic strength is now being eroded and questioned. The productivity slump is an American climacteric.
—C. Jackson Grayson Jr., chairman of the American Productivity Center
Like a man in his prime, American productivity had looked so robust, so deceptively healthy. From the end of World War II through the 1960s, it increased comfortably at an annual average of just over 3%. The first symptom of trouble struck in the 1970s, when gains started averaging half of that. They tumbled to 1.6% in 1977 and .4% in 1978. Now that most important measure of an economy's efficiency is showing the most alarming decline. Output per hour worked in private business dropped at an annual rate of 2.8% in this year's first quarter and 3.8% in the second quarter. Only the U.S.'s highly efficient farms stopped a much more dismal performance; not counting them, private productivity from April to June dropped at a 5.7% rate, the worst plunge since statistics keeping started more than three decades ago.
Despite the drop, the U.S. remains first in the international productivity league, but its lead is narrowing. Over the past ten years, nonfarm private productivity increased only 27%—the same as in Britain, but less than half as much as in France, West Germany and Italy and less than a quarter as much as in Japan. In 1950 it took seven Japanese or three German workers to match the industrial output of one American; today two Japanese and about 1.3 Germans do as well. Says Economist Arthur Laffer: "The U.S. is the fastest 'undeveloping' country in the world."
Nobody knows the deeper reasons why productivity is declining, let alone so rapidly. The question of whether people on the job are working as hard as before has been the subject of countless barroom arguments and almost no serious study. There is better evidence of other causes:
EXCESSIVE REGULATION Government rules have forced companies to spend cash on costly environmental, health and safety equipment rather than on modern machines. Earlier this year, the congressional Joint Economic Committee deplored the fact that U.S. industry in 1977 had to spend $6.9 billion for pollution-control equipment "that does not contribute directly to the production of measured output."
INADEQUATE INVESTMENT In the 25 years up to 1973, business spending on new plants added about 3% a year to the nation's capital base—plants and machines—but since then the total has risen only some 1.75% a year. Businessmen blame the drop on regulation, profit squeeze, high taxes on capital, and inflation, which saps the confidence that is necessary for investment.
REDUCED R. AND D. Spending on research and development has dropped from about 3% of G.N.P. in 1964 to 2% last year. One reason: managers have concluded that inflation makes the payoff too long-term and too uncertain. One result: the number of U.S. patents issued to Americans has fallen 25% since 1971, while the number issued to foreigners has risen 14%.
SURGE OF SERVICES They now account for 46% of G.N.P., up from 31% in 1950. It is harder to increase the productivity of a doctor, policeman, barber or bureaucrat than an assembly-line worker.