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Sunday, December 31, 2006

The Economic Mega-Worry By Robert J. Samuelson

The Economic Mega-Worry - It's productivity, which is the wellspring of our rising living standards. Growth has been strong for the last decade, but it may now be slowing.
By Robert J. Samuelson
© 2006 Newsweek, Inc

Jan. 8, 2007 issue - The start of a new year is a good time to take stock, and there are few better indicators of our long-term economic prospects—and also our prospects for political and social peace—than productivity. As anyone who's taken basic college economics should know, productivity is simply jargon for efficiency. It's also what most people think of as economic progress. The good news is that productivity has been growing strongly; the bad news is that it may slow down.

To see why that matters, consult a fascinating government report, "100 Years of U.S. Consumer Spending." A century ago, Americans spent 43 percent of their incomes on food and another 14 percent on clothing. By 2002, those shares were 13 percent and 4 percent. Meanwhile, family incomes (after inflation) had tripled. Filling the spending gap are all the things we take for granted—cars, TVs, travel, telephones, the Internet. Home ownership has zipped from about 20 percent to almost 70 percent of households.

This triumph of mass consumption is usually credited to technological breakthroughs, from the assembly line to computer chips. But the whole process is also described as productivity improvement. In 1900, 41 percent of Americans worked on farms. If mechanization, new seeds and fertilizers hadn't meant that fewer people could produce more food, we'd still be paying two fifths of our income to eat. Labor productivity is measured as output per hour worked. Whatever enables people to produce more in a given time (machinery, skills, organization) boosts productivity.

That in turn raises our incomes—or gives us more leisure. It also promotes domestic tranquillity by muffling the competition between government and personal spending. Slow future productivity growth virtually ensures a collision between the heavy costs of retiring baby boomers—mostly for Social Security and Medicare—and younger workers' living standards. Higher taxes will bite deeply into sluggish incomes. The reason: what seem to be tiny productivity shifts have huge consequences.

Consider. In 2005, the U.S. economy produced $12.5 trillion of goods and services, or gross domestic product (GDP). Per capita income—the average for individuals—was $35,000. If productivity growth averages 2.5 percent a year, the economy reaches $34 trillion in 2035 (in constant "2005 dollars"), estimates Moody's Per capita income rises to $73,000. Now, suppose productivity growth averages 1 percent annually. Then GDP in 2035 is only $23 trillion, and per capita income is $48,000. That $13,000 gain ($48,000 minus $35,000) may look large, but it occurs over three decades, and for workers part of the gain would be taxed away to pay baby boomers' retirement costs. Typical take-home pay would rise less than 1 percent annually.


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