DOCUMENT RESUME .

ED 213 923 0 Q31 634 ).

TITLE . Productviiy, People, and Public Policy.INSTITUTION Chamber of Commerce of the United States, Washington,

D.C.'PUB DATE '[81]

. )NOTEAVAILABLE FROM Chamber of Commerce'of the United States, 1615 H

Street,'N.W., Washington, D.C; 20062 (1-9 copies,.,$10.00 each; 10-99; $9.00 each; 100 or more; 18.00each).

EDRS,PRICE- MFO1 /pC01 Plus Postage.DESCIIIPTQRS Adults; Definitions; *Economic Development; Finance

Reform; Financial Policy; Financial Prob3ems;*History; *Inflation (Economics); Policy Formation;!Productivity; Public Policy; Retrenchment; Sa,laries;Wages; *Work Attitudet'

IDENTIFIERS . *Limited StatesA

ABSTRACTThis-booklet, prepared by the United States Chamber'

of Commerce, is in ,ended to help create a better public understanding-of how productivity affects this country and to suggest how peoplecan change public policy in favor of a revitalized America. Thebooklet is organized in five sections.. The first section definesproductivity and introduces the problem of the decline of

'.4 productivity in the United States; these-concepts are augmented in.theplecond section by a discussion of measures of productivity and.real earning* as related -to productivity. In section 3, the economichistory of the United States is explored as it relati'sto thesltiWdowri of productivity ilh.recent.years.',Section 4 further exploresthe productivity problem-- at caused it, what has happened toinvestment incentives, and'-what the2exOrts say;- some solutions areproposed in the last section. An iPtendix to the publication,containstables showing real speedalzle average weekly earnings, 1947-1980;United-States spending on reserch and development; growth irate of

. the'real net capital.stockp average'age of United States equipientand structures, 1925-1980; and cash flow as .a percent of GrpssNational Product. (KC),

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* Reproductions supplied by EDRS are-the best that can be:

Made *.

*. from the original document. , , *

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"PERMISSION TO REPRODUCE THISMATERIAL HAS BEEN GRANTED BY

Aittiree M. _IttatTO THE EDUCATIONAL RESOURCES.

Productivity, People,and Public Policy

fS

S DEPARTMENT OF EDUCATION,NATIONAL INSTITUTE OF EDUCATION

EDUCATIONN. RESOURCES INFORMATION

CENTER 1ERIC,

document has been ttrOduced asreCoeved from the DerS0o or OrganizationOeginatinq

Minor changes haVe beer)yroade to improvereprodeo eon OtJaNtY

P.oints of 0ow or Op./loons stared ,r1 this don)INFORMATION CENTER (ERIC) rripnt do of1t neee,WIly represent c tf, oi NIE

OOSitrOn Or (,Witty

The U S Chamber of Commerce be-lieves th,?t the people of this nationcan no longer delay a conffontationwith the productivity challengePublic policy has a direct effect on

prothictivity, and (therefore on theliving standards of the Americanpeople On their behalf, theChamber is cc-Animated to an bdvo-cacy role in public and private

a-

forums, to encourage new policiesthat will enhance U,,S. productivityperformance This effort is coordi,nated and diiected by theChamber's-Productivity Center

Dr Richard WRahn,Vice President and Chief EconomistDr Carl W. NollerDirector, Productivity Center

Q/ Ronald D. Utt c,Associate Chief Economist

Dr James A. Clifton,Director, Inflation Fight Center

Y.*

Economic Policy DivisionU S. Chamber of Commerce1615 H Street, N.WWashington, D.C. 20062(202) 659-3163

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Table of Contentst

I. Introduction .What% happening to this country ofours?

-tat.,

Productivity and Living StanciprdsWhy focus-on productivity? 4 - \

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1Figure 1 Real Earnings and Output Or Hour: 1947-19791

Figure 2 Real Spendable Average Weekly Earnings: 1947:1980 , 2,How is productivity measured?

2.,- III. Historical Experience ' , 3

How did we get where we are? A C 3Figure 3 U.S. Average Annual Productivity Growth: 1889-1980 3Figure 4 Real Domestic Product per Employed Person for Selected Countries. 1950-1980 3What has happened in recentyearr 4'Figure-5 Productivity Growth.in Various Sectors: 1948-1980 4Figure 6 U.S. Spending on Research and Development: 1953-1979 5Figure 7 Civilian Research 4nd Development Spending for Selected Countries: 1961-1976 5. Figure 8 The Capital-Labor Ratio and Its Rate of Change: 1947-1979 6Figure 9 Growth Rate of the Real Net Capital Stock: 1948-1979

,6Figure 10 investment Rates in Selected Countries: 1970-1979 7' Figure 11 Average Age of U.S. Equipment and Structures: 1925-1980. 7Figure 12 The Industry Composition of Slower Productivity Growth. 1947-1979 vs. 1974-1979 8

IV. The Productivity Problem Explorqd t.C. 8

.....What cause the slowdown? - ./What's happened to investment. incentives? 4.

8

9,Figure 13 The Attractiveness of Investing in DeprecoblefAssets 1955-1980.. -. 9Figure 14 Cash Flow as a Percent of_GNP: 195-08o9

What do the experts.say? . . 10V. The Road to Recovery. ' < .. 10 \

How can we come to grips with the productivity problem'10 f,

What changes must the private sector make? I 10 -.What role can the goverxment play?'11

,Can we do the job "2

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VI. Appendix .13 ..

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I. INTRODUCTION

hat's happening to thiscountry-of ours? He put

down his .half -empty cup of coffeeand looked across the dinner table athis wife of 26 years._"I feel like everything we've workedso hard for is slipping away from us!"In one way or another, millions ofother America& families have startedsimilar discussions in recent timesSomething is wrong! It's paihfully ob-vious to everyone!Inflation is taking its toll on all-Ameri-cans. She sees it everytime she goesshopping. He sees it in the operationof his small busi.ness--the rising costsof materials, and the extra timeandexpense of keeping up with rules andregulations He sometimes wonders rfit IS worth staying ih busines?.

' They are shocked at the cost of heat-ing,their home and driving their car.They have conflicting emotions whenthey see so many fuel-efficient for-eign cars on the streets. They are im-pressed at how well-built ,they seem,

lout alarmed at how the Japanese andGermans seem to be outpacing useconomicallyThey are concerrTi about the erosionOf their savings They wonder hOw

\ their children will be able to afford ahome of their Own They seetheir ownstandard of living slipping. They jtIstdon't seem to be akle to make ft anymore on his incdme aloneand so sheis about to go back to work. Other-wise they simply won't be able to dothe things they once did. And they'dhave to give-up hope dcloing some ofthe things thy'd planned to do. Theyworry about their retirement. Theywonder if theyandthez childrenare simply going to have llo "settle forless."They are upset, too, about the high

, taxes they have to papThey are con-cerned that their taxes are helping toperpetuate what they perc ive to bean unfortunate change in -e waymany people appi-oach life in merica

-"today They are disriviyed at hat ap-pears to be a lack of pride in doinggood work, at a growing "me-first"attitude, ac the widespread feelingthat "goverkient"Will take care ofme

1The increasing concerns of averageArrierJcans like these have led to afundamental change in this nation'spolitical thinking.The election of1989, provided a popu-lar mandate for a national economicand social self-evaluationOarechart-ing of our course, and the beginningof a nationwide effort to rejuvenate,

-,revitalize, and rebuild America.Mfiny thoughtful people believe that

Figure 1

Real Earnings and Output Per Hour: 1947-1979(Privte Business Sector)

(1967 - 100)

10 , ,

ProductIvItyy_,"--)0

70

N'\

Ir30

Real Hourly Earrillngs

,

30

.

1947 1952 1957 A1962 1967 1972 1977 79Source. U S Bureau of Labor Statistics

our national self-evaluation shouldfocus on productivitythe measuLe ofthe output of the nation's goods andservices per unit of input. The U S.Chamber of Commerce agreesandfor that reason, has prepared thisbooklet. Its purpose is to help create abetter public understanding- of howproductivity affects this country ofours, and suggest how people canchange public policy in favor of a re-vitalized America.

II. PRODUCTIVITY ANDLIVING STANDARDS

by focus on Productiv-ity? Productivity is the

term used to describe the measure-ment of goods and services producedby a given input ofresourceslabor,energy, or capital. It may measure theoutput of an irfFlividual, a company,an industry, a region, a nation.Productivity has a close statistical rela-tionship with real hourly earnings,the buying power of the peoplebe-cause one cannot buy somethingunless it is produced. Productivity in-

"'creases when more goods and servicesare produced per Man-hour. This meanshere is more o buy and consume for

the same inpu price. So real hourly, earnings go up. e reverse is equally

true when pro tivity declines,fewer goods and services are produced,so real hourly earnings decrease.For this reason, productivity is consid-ered an "index of the nation's eco-nomidwelfare." It measures the na-

tion's production efficiency and over-all well-being at a given point in time.A closely related Concepfis ''produc-tivitygrowth.'f It measures changes inefficiency and well-being over timeand therefore indicates whether b y-ing power is rising or falling.There is an important conceptua dif-fererithetween the two Wher/pro-

.ductivity declines, our standard, of liv-ing declines. When produictivitygrowth declines, the rate of im-provement of our standard of livingdeclines.

As productivitylgoes, s goes the na-tion's buying power.Figure 1 shows the ose relationshipbetween-real ho rly earnings andproductivityfoctjsing on the privatebusiness ,sector in the period sinceWorld,War II.When productivity increases rapidlyas it did in, the pehod from 1948 to1968 .re I hourly earnings also, in-crease r pidly. This translates into asteady se in the nation's standard ofliving. hen the increase in prpcluctiv-ity slo s downas it did from 1969 to197,8 growth in real hourly earningsslow down as well, and our standardof liVing rises less rapidly.` When pro-

ivity actually decreases; --.. 4sitbeg n to do in 1978real hourly earn-ing decline, and our standard of liv-ing 'drops.

Th problem today is caused by theco tinuing decline in productivitygr wth. -To ay in America, the'problem is not

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the level of the nation's productivity.We still produce more goods, an ser-vices per worker than any other un-try. But as our productivity gr thcontinues to decline, we ,are r idlylosing our advantage over the rthe world.This means that we are having greaterdifficultyliemaining competitiveour major trading partners in theproduction of goods and services. Thismakes it difficult to maintain a favorable balance of international trade,

sand contributes both' Our inflation.\rate and ,unemployment.

In 1971, we experienced our first tradedeficit of the 20th century, and haverun almost continuous and Increas-ingly, large 'deficits since then.Whereas we once dominated themarket forwanufacture.d goods, wewere surpg3sAl years ago by WestGermany and are now virtually equal-led by the Japanese Several Americanrodustrres have been seriously af-fected by flood of irpported prod-

.-, ucts. As a result,he Amencao peoplehave paid a heavy price in lost incomeand industrial dislocations for our de-cline in productivity growth.

their tolls. During Octobec, 1980, theaverage married worker with threedependents earned $82.92 a week in1967 dollars. At the end of 1980, realspendable earnings had dropped by7 0 percent from 1979 and stood at alevel last attained in 1961. OtherMeasures of real earnings, kke real

such as new technology, capital in-vestment, utilization of plant capac-ity, energy use, and managementskills, as well as labor effort As such,they.do not permit a breakdown ofthe various components For example,automating a° process shows an in-crease in labor productivity as re-

weekly earnings and average hourly ported by BLS measurements butearnings, show similar though some- there is no way toindicate the specificwhat less dramatic declines- , efficiency of the capital or energy IQ-the American people are aware of volved in acquiring and operating thetheir worsening situation. The Inaba- new equipmentity to "get ahead" on lust one income Between 1982 and 1984, the Bureauled millions of women into the labor will begin, publishing five new meas-force during the 1970's. Consequently, ures of productivity that' will break.disposable income per capita has ac- out the individual comporients, labor,.tually risen, temporarily insulating capital, energy, materials, plus afamily budgets,-With large reserves of weighted average of the four factors,.potential workers dissipated, how- called "multi-factor" productivityever, any future declines in earnings To.achieve the general °measures thatwill bear much more directly on what are now being 'published, the BLSa household can actually buy. computes productivity for 5 basic eco-Figure 2 shows clearly how spendable nomic aggregates on both a quarterlyaverage weekly earnings, expressed in and' annual basis private business;1,967 dollars, have deiclined sincet972 farm, non-farm ibusness; non-farm

non-manufacturing business; andManufacturing, including a breakbutow is productivity mess- of durable goods and now-durable

ured? The Bureau of Labor goods. Ten industries are measured onan annual, basis. agriculture; con-struction, mining, transportation;communications,'utilities; wholesaleand retail Trade, finance, insurance,and real estate, business and personaeservices; and government enterprises.In addition, annual productivitymeasures have.been made of selectedindustries from 1947 to the Present.'Each measure is a ratio between thelevel of output and the correspondinghours of all persons engaged in pro-ducing it For the measures of nationalproductivity, natidnal income ac-

Statistics in the U.S. Department ofDeclining,productivity Irowth affects Labor compiles a comprehensive setall Americans- of productivity meas'ures TheseAs prOductivity growth -slows down, measures are called "output perstagnates, or declines, there follows a, man-hour,': and therefore have oftendistressing re ction in real spenda- been interpreted as representingt,ble average eekly earnings-Lwhatis .. only the efficiency of labor. But theleft after Social Security, federal in- data that result lump together the'come tax s, and inflation have taken combined effects of many influences,

Figure 2 %

Real Spendable Average Weekly Earnings: 1941-1980(Jr 1967 Dollars)

I

100

90

. v.. )

Z.193.63

80

,.,'

'

,

-

.

v84. t:

9 0:86 .

83.11

70 72.79

80.32 .

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-.

60

66,73

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,

. .

,

.

.

,-

50

.

.

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4

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.

counting concepts in constant dollarsare used. Flours of-persons usually re-flect paid hours, including holidays,vacation, and sick leave in addition tohours at work.Productivity measurements vary intheir accuracy.When reviewing any one of these

. measurements; it must be recognizedthat the study is by no means an exactscience. Productivity measurementsare most accurate for the manufactur-ing sector of thp/econorny, and the_production of tangible items But thisactivity comprises only about 300/2 oftotal output.The problem occurs in attempting tomeasure the delivery of services, iden-tified by BLS as "non-farm non-manufacturing business for exam-ple, if is not meaningful to measurethe productivity of a phystcian interms of the number of visit his pa-

1947 1952 1957 1962 1967 1972 1977 1980 Nnts niake to his office each monthMore appropriate would be the level

Source U S Bureau of Labor Statistics, as found in Employment and Training Report of. of health of his patientsbut that isthe President, September, 1980, Table C-11 difficult to measure accurately Non-

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2

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I

farm non-manufacturing businessrepresents an increasingly importantpart of the national economy,amounting to 62% of the tot.Similarly, measures of productivity byindustry do not necessarily indicatedifferences in quality. For example,metal-lurgical coal is of greater valuethan steam coal. So it pays to mine it inthinner seams even though outputper hour is lower thah when miningsteam coal.Prothictivity growth resulting from

- the introduction of better qualityproducts, or the replacement of aproduct by a new stenVis not easilymeasured either. Nor 'is it easy to

'measure a decrease in productivitybecauie of a deterioration in productquality.,Coming up with an accurate meas-urement for labor input today is espesally difficult Meuse of paidhoursasa measure of labor input overstatesthe actual physical input of labort'AsUniversity of Michigan study revealsthat there are more paid holidays andvacations now than 15 years ago, andfewer minutes actually worked in a

'typical/day, Similarly, some expertsclaim that during periods of rapid in-

.flation rising prices distort the calcula-tions, and cause output per man-hourto be undehtated.,Of course, the measurements must beinterpreted properly,' within an ap-propriate frame of reference Forexample, productivity growth mayvary greatly within normal short-termbusiness cycles,, and can even be af-fected by events such as a severe win-ter. Therefore, annual or shorter termproductivity measures are less usefulin depicting accurate trends than

Figure 3

U.S. Average AnnualProductivity Growth:1889-19801

1889-19,19

1920-1947

1948-1968

1969-1973

1974-1980 -

Source: John W. Kendrick, qestwar Produc-tivity Trends, Table 3-2 for data tnru 1973,supplemented, by U.S. Bureau of LaborStatistics data.

'Labor productivity is measured far thePrivate business sector _

For example, some induStries use pro-ductivity growth figures to negotiatewage increases, and to highlight pos-sible problenfs calling for action.Differences in productivity growthamong countries indicate changes ininternational competitiveness in basic,industries, and serve as a basis forpredicting future patterns of exportsand imports.For all its uses, productivity is difficultfor many people to grasp. Yet it under-lies more visrble economic indicatorssuch as inflation-per capita incomes,and economic growth. Like thehuman heart, productivity is hidden.Bill it is basic to the economic pCilse ofthe nation.

HISTORICAL EXPERIENCE

ow did we get where weare? America's productivity

growth has been plotted from 1889 tothe present. Figure 3 shows how an-nual growth averaged about 2% in

, the 1889-1919 period, then increasedto an average of about 2.2% from1920 to 1947 It was during this firsthalf of the 20th Century that we ac-quired the standard of living that hasbeen sooloften described as the "envyof the world."After 'World War II, productoRtygrowth spurted to 3.2%as Americanindustry shifted the enormous

.. amount of technorogy and manage-ment skill gained in wartime to thetask of meeting the nation's pent-updemand for peacetime consumergoods. This, was a peak period inAmerican economic history. Livingstandards soared. We became theleaders.of an egtrging world econ-

longer term measurements that in-corporate6everal up-and-down cyclesin output. The current productivity"problem" addressed in this bookletrefers to a trend that has been taking -place over a decade, rather than nor-mal.short-term aberrations.Measurements of productivitygrowth are valuable economic tools.Despite the difficulty in assuring theiraccuracy, productivity measurementsrepfesent the best way known toevaluate the ecohomic health of thenation. They are also va1uable.tools inmany specific areas of the economy.

Figure 4

Real Domestrc,Produla per Employed Person for Selected Countries: 1950-1980

Re'lapveProductivity'1986*:

Japan 68:4

West Gertnany 88.7

Itily 60:6

France 89.4.

Canada 92.1

United Kingdom_ .60.8

United States,, 100..0

Average Annual % Change in Productivity'

1950-1968

\J 7.7

".15.4

5.8

14.6

12:6

1 2.4

4,

8.4

1974-1980

13.5

12.9

=1.812.6

0.0

1.3

0.3"1 .

'Real gross domestic product per, employed person using international price weights, relative to the United States,..

.-'Growth in/eaktomestic product pej emplgyed person using own country's price weights This way of calculating prtuctivity isused Only,tor interpational comparisons, which accounts for fhe discrepancies with Figure 3Source: U.S. Bureau of Labor Statistics

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omy. There appeared no limit to ourwealth.But then, after 1968, productivitygrowth began its drop. There weretwo distinct declines -to 2.2% during1969-1973, then a precipitous slump to0.6% during 1974-1980, for an aver-age annual yearly rate of 1.3% from1969 to 1980. The growth rate of pro-ductivity was negative in 1978, 1979,and 1980-the first time this has hap-pened since data collection began in1909. A temporary negative growthmight be understandable in recessionperiods. But it is very distressing toexperience negative growth rates ty-ing a recovery.While this decline was taking place in

A 44;'

the United States, other cduntriesnotably Japan, Germany, and FranCe

-still were experiencing productivityincreases.

Figure 4 on the previods page showsthe relationship between the produc-tivity of the United States, Japan,'Germany, France, and three othermajor trading partners in 1980. TheU.S. is referenced as 100, and theothers as a percentage of the U.S.level. Canada is closest to the UnitedStates, with productivity at 92.1% ofours. France stands at 89.4%, WestGermany at 88.7%, and Japan at68.4%..The impact of these figuresbecomes clear when you note how theproductivity growth rates of these

i k ,counts s (Aware to ours It is esti-mated hat Canada., France, WestGermany, and Japan will pass us inproductivity by 1990 if present esti`.-mates prove accurate.The key to a strong econo y is posi-tive annual productivity gr h at arate high enough to assure 6 healthyincrease' in real hourly income, asmore goods and services are pro-duced. The U.S. Chamber of Com-merce feels that a 2 5%-3 5% rate ofincrease is a reasonable goal based onour historical experience and futurepros,p0pcts.

An increase of this magnitude willbring about other bknefits to theeconomy as well. Whenever labor, en-

Figure 5

Productivity Growth- in ,Various Sectors of the Economy: 1948-1980(Annual Percent Change)

0

er.

PrivateGDP in , Business

Year 1972 $ Sector

194819491950

19511952

'195319541955

19561957195819591960

196116621963'19641965'

194196719681969 .1970

19711972197319741975

1948-19581959119691970-1980

4.1,0.58.7

893.738

16.t

2.1 1101.8 2 5

-0 3 3.16.0 .. 1 621 3.1

2.6 3.35 7 3.84.05.2 46.0 it 3.56 1 3.1

2.7 2 24 6 3.32.8 0 2

-0.2 0.93.35.65.5

-07-0.9

3.54.32.8

5.3157.9

2.8,3.2121:64.0

3.6352.7

-2.32.3

3.3291.4

1976 53 3.31977 5.4 2.11978 4,6. -021979 2 8 -0.41980 -0.3 -04

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1

SouLce: U.S. Bureau of Labor Statistics

FarmSector

3.55.8

12.6-5 5' 9 5 ,

5.12.77 7

, 3 28.4

4.29.00 27.4

13.2

10.8-0 914.1

0.37.8

13-75.414

8.9-3.3

1.50.69.5

6.84.53.0

Non-farmBusinessSector

4 3 . . 6.3242;. 4.060

di.

1.72.31.71.43901.3

172.41.62.5

2.93.63.23.93.1

2.51.933

-030.3

3.33.72.5

-2.421

, 0 0 e. 3.24:5 2.0

-1.9 . -0.29.5 -0.83.5 . -06

2.52.61.2

AllManuf'g

3.41.81.71.65.0

-0.72.1

4.407274.37.248311.1

,' ' 0 03.51.7

-0.26.1'5.05.4

-2 42.9

4.42.40.91.0

-0.5

'2.73.023

Manufacturing

Dura bibGoods

6.242581.92.41.20.95.7

-3.11.6

-2.44.80.3

2.44.86.55.,5

3.7

0.00.4

1.0-1 5`

6.34.937

-2.82.4

572:6.1.0

-0.3-1.4

- 2 23.0149

Non-durableGoods

NonfarmNon-

manuf'gBusiness

6.7 3.14:6 0.84 0 6.6

4.3 1.10.6./ 2.61 7 1.8

3.7 1.03.5 3.5

3 0 0.72.7 1 5

3.2 3.44.5 .2.81.2 0.8

3.3 2.93.5 3.38.1 1.43.8 -3.42 1 3.1

26-0.7

402.91.6

3.3283.2

-1.30.5

5.8 2.05.3 3.18.0 1.1 .

-1.7 -2733.4 1.8

2.7 2 72.1 1,7,0.8 -0.73.1 -1.60.9

3.53.22.9

2.42.307

48

ergy, and capital or other inputs are Figure 6used more efficiently, resources are re-leased into the economy to create U.S. Spending on Relearch and bevelopment: 1953-1979new goods and services.Costs of production are also reducedas productivity growth increases, andthat can result in either lower prices orhighe rofits, depending on the de-mand f the product or service at thetime.

hat has happened inrecent years? America's

decling annual productivity growthmut be reversed.To achieve the desired level of produc-tivity growth, action will be requiredin a number of critical areas. Definingthose areas requires a careful exami:nation of the period since World War

Figure 5 is based on 8LS productivitygrowth figures in the postwar petlod-1948 through 1980-and is the basis,for determining the averages that

\show the long-range trends.We can learn from the past - 1948-1968: America's Economy Takes Off.In this postwar period, 'annual pro-

.,ductivity growth averaged 3.2%.Many of the factors contributing tothis outstanding performance areknown. The manufacturing technol-ogy gained 'during World War II wasapplied to peacetime production. Re-search and development surged, asindicated in Figure 6. Civilian R & Dgrowth did not increase as fast as forsome of out major trading partners,but Figure 7 shows it advanced at ahealthy rate 'nonetheless. ompanies

(As a Percent of GNP)

3.0

2.5

-'2.87 2.83

, Total Defense andCIVIllan R&D

.,

2.0

2.39

.

.2.34

2.27 2.29

1.5 Total Civilian R&D--'.----"154.

1.0

1.40 -`1.50,

1.44 1.50

..

1.30

1.10

0.5. 2 t

i

.....,.

-,i,.

1953 1958 1963 1968 1973 1978 79,

Source National Science Foundation, National Patterns of R&D Resources, as presentedby George Carlson, Office of Tax Analysis, Office of the Secretary of the Treasury, January6, 1981

invested in new plants and equipment- causing the capital-labor ratio toalmost double between. 1948 and1968, as you can see in Figure 8. Theshift of labor from farm to moreproductive non-farm employmentimproved the measurement figurts.o

Figure 7

Civilian Research and Development Spending for SelectedCountries: 1961-1976(As a Percent of GNP)

YearUnitedStates'

WestGermany Japan

UnitedKingdom France

1961 1.22-

N/A 1.37 1.48 G.971962 1.22 1.14 1.46 N/A 1.031963 1.30 1.26 1.43 N/A 1.10

'1964 1.30 1.38 1.47 1.46 1.341965 1.34 1.53 1.53 N/A 1.371966 1.42 1.62 1.47 1.58 1.401967 1.48 1.70 1.51 1.68 1.501968 1.50 1.72 1 60 1.70 1.541969 1.51 1.81 1.64 1.69 1.491970 1.52 1.96 N/A N/A 1.471971 1.48 2.16 N/A N/A 1.371972 1.44 2.13 N/A 1.49 1.311*3 - 1.44 2.01 N/A N/A 1.301974 1.50, 2.27 1.91 N/A 1.341975 1.-50 2.20 1.91$ N/A 1.411976 1.45 2.09

#1.50 I 1.42

Source National Science Foundation, Science Indicators: 1978, as presented by GeorgeCarlson, Office of Tax Artysis, Office of the Secretary of the Treasury,January 6, 1981

9:

The strong demand for goods andservices that kept plants operating atnear capacity was important. An ab-sence of inflationary pressures, ex-pensive energy, and restrictive socialregulation provided an excellentmate for productivity to increase.Estimates have been made of howfactors like these have affected pro-ductivity.However, at least half of the im-provement' in productivity clueing1948-68' has not been attributed toany specific category. Rather. it haibeen lumped together under generalheadings such as "improvements inknowledge," an "explosion in man-agement science," "improvements inquality," and the "unique positionAmerica held in the internationalmarketplace" while our competitdrswere rebuilding economies.shatteredby war.By 1968, the stimulative effect of thesefactors had subsided or was beingoffset.'1969-1973: The Slowdown Begins.During th'e 1969-1973 peniol, produc-tivity growth fell from an average of3.2% to 2.2%. The capital-labor ratio

"began behaving in an unchartcteristicmanner, ?egistering unusually smallincreases in 1972 and 1973, as you cansee in Figure 8. Rgal capital stockgrowth for these years wasmoderately below the 4.5% average

5

Figure 8

_The-Capital-Labor Ratio: and its Rate of Change:1947-1979'(1972 = 1 60000)

YearL borRatio'

Rate ofChange Year

Capital-LaborRatio'

Rite ofChange

1947 0.50337 1963 0.783161948 p.53022 5.33 .1964 0.80107 2.291949 0.55375 444 1965 0.81727 2,021950 0.57361 3.59 1966 0.84517 3.411951 0.58463 1 92 1967 - 0.88358 4.551952 - 0.60131 2.85 1968 0.90555 2.49T953 0.61013 1.47 1969 0.92168 1.78

954 0.64062 5.00 1970 0:96642 4.851 55 0.63930 -0.21 1971 0.99870 3.341956 0.65062- 1.77 1972. 1:00000 0.131957 0.6,7$07 4.22 1973 1.00562 .0.561958 0.71797 5.88 1974 1.03146 2.57 .1959 0.7,0843 -1.33 1975 1.08788 5.471960 0.72451 2:27 1976 L07754 -0.951961 0'.75066 3.61 1977 1 06216 -1.431962 0.76186 1.49 1978 1.04711 -1 42

1948-1958 J.301979 1.04411 -0 29

1959-1969 2 311970-1979 1.28

'Private business sector net capital stock data, Divisia aggregated, divided by paid hoursof all persons.Source: U S Bgreau of Labor Statistics

enjoyed from 1948-1968, as indidatedin Figure 9.U.S. spending on all types of researchand development, as a percent ofGNP, fell from 2.83% in 1968 to 2.340/0in 1973, while civilian R & D fell from1.50% tp 1.44%, according to Figure 6.This was less than the relative corn-mitments of both West Germany andJapan,The slowdown in this period was abet-ted by an accelerating inflation thatcoincided with the advent of GreatSociety social programs and greaterinvolvement in, the Vietnam war. Inaddition, the first surge of post WorldWar II "babies" entered the laborforce, often as Unskilled Aorkersneeding considerable training. Thefirst impacts of expanding govern-ment regulation were felt, as well.The most conspicuous declines intpro-doctivity growth during the 1969-73

,period -occurred in the non -farmnon-manufacturing business sector, asindicated in Figure 5. Mining, con-struction activity, and the combinedcategory of finance, insurance, andreal estate all showed a nottreablesliming in productivity performance.There were exceptions to the generaldecline during the 1969-1973 period -notably , government enterprises, spr-vices, and Wholesale trade.

1974-1980: The Slowdown Worsens.The productivity slowdown that,, Source U S Department of Commerce, Survey of Cdrrent Business, February 1981, p. 60

began in 1969 accelerated rapidlyafter 1973. Even excluding 1974, whenthe decline could be attributed to thecteepest recession of the postwar4period, productivity growth averagedonly 1.1% per year from 1975 through1.980 - the worst record since theGreat Depression. As previously

nOted, the instances of declinescaused by recession periods were notfollowed by substantial and sustainedincreases in the recovery pe(iods, asmight have been expected from his-torical ehenence. Negative valueswere reported for 1978 through 1980.Growth of the real net capital stockdeclined severely during this period,as shown in Figure 9. Analysts couldremember no other time whert thestimulus o economic recovery pro-duced such a weak response in.ca taiinvestment as during 1976-1979 Th'eincrease in the capital-lab& atioslowed considerably' during thisperiod, as .indicated in Figure 8. Theaverage l'r crease during the 1970'swas, 1:28%, only 40% of the typical

1948 -1968. Indeed,the ratio has actUilTrFeclined for fourconsecutive 'years, beginning with1976.The decline; in capital investment andthe capital-labor ratio in the 1974-1980 period take on an even moresomber perspective when comparedwith What was happenihg in othercou tries. In terms of capital invest-me t, Figure 10 showsus in last placeamo g our major trading partners. Asa percentage of GNP, for every threedollars we spent' on plant and equip-ment, Canada, West Germany, andFrance spent roughly four dollars and

-japan spent almost six dollars. Andthese comparisons would be evenmore unfavorable if the data were ad-justed for the greater regulatory bu r-der\ imposed on U.S. firms.As for capital-labor ratios, the UnitedStates dropped from firSt to sixth in

Figure 9

Growth Rate of the Real Net Capital Stock: 1948-1979(Net Stock of Fixed Nonresidential Private Capital in 1972 Dollars)

8.08.0

7.0 1 \6.0

,

5.0 . ,5 .2

4.0

./-4 3 Abk,

.

Ailli A 4.0N.r..

3.0

.riff

.2.0 .

1948 1953 i958 19A3 icIAR 1c17 1078 70

6 in

terms of capital per worker.Other measures were also indicatingproblems in the 1974-1980 period.Figure 11 shows that the average ageof structures.and equipment stoppeddeclining about 1973=74 ConSider-able headway had been made previ-ously. Between 1945 and 1973, the av-erage age of structures fell continu-ously from 21 64 to 13.38 years. Theeequipment series behaves similarly.The auerage age of equipmentdropped steadily from 10 18 years in1935 to 6 30 years in 1951, rose to 7.25in 1962.1963, and 'declined again to6 years in 1974. At that point, thetrend toward modernization came tokhalt= and, for the first time since theGreat Depression, the age of both

.structures and equipment began toincrease.

During the 1969-1979, period, growthof expenditures for research and de-velopment also slowed, especiallywhen related to GNP Total defenseand civilian R & D spending peakettl in1964 and his declined almost con-tinuously since then. However, mostof the decline,has been in defense andspace programs of the federal gov-ernment areas not considered ofmajor importance to the nationalproductivity effort Of more im-portance is total civilian R & Dfor itrepresents the effort to develop new

' products 'and technology that affectour economic well-being Civilian R &D exanded as a percentage of GNPdung the 1960'sto 1 51% in 1969.But then it leveled off, and remained

1

Figure 10

Investment Rates In Selected Countrles49701'979(Gross Fixed Private and Nonmilitary Government Investment as a Percent ofGNP)

22.32

18.80.2

17.5

33.0

U.S u.k. Italy Nether- Canada West France Japanlands Germany

Source1980

U 5 Department of Commerce, IntOrn ational Economic Indicators, December

virtually On a plateau through 1979%;asshown in Figure 6. Other countries al-ready had surpassed the U.S. effort incivilian R & D by the early1960's. WestGermany and Japan increared theirR & D commitments as a percent of

Figure 1 1

Average Age of U.S. Equipment and Structures: 1925-1/980. 4

22.

--- 4

20

21.64 .-

.. -

18 18.00

1.938

... 4 Structures ...*----

16

17.79

.

14 . . 14.45 14 02

12i

. , , 13.5

10 10.18 Equipment --

8

8.54 //8.26 .

6. 6 61 7.02

6.35 6.35

4

.

1925 1935 1945 1955

GNP during the 1970's, thereby ex-panding their relative advantage overus, as indicated in Figure 7.Things got worse as-the 1970's pro-gressecIAThe productivity decline in the 1974-1980 period was more wicleipreadthan during-1969-1973.Productivity growth was down in allsectors relative tb the 1960's and thetrend got worse over time. In the pri-vate business sector there were threeyears of negative growth in 1978,1979, and 1980.In addition, of 77 specific industrygroups measureci.by the Bureau ofLabor Statistics In the 1980 edition ofProductivity Indexes for Selected In-.dUstries, 56 showed a dropin produc-tivity growth iii the 1974-1979 periodcompared to 1947-1979. Only 20 in-dustries showed any improvement;one was unchanged.Declines were especially significant inbituminous coal mining, blended and

` prepared flour, brick and structuralclay tile, steel foundries, both gas andelectric utilities; and petroleumpipelines, as yob can see in Figure 12.Since the decline in productivitygrowth in the 1974-1980 period was so

,much greater and more brogd basedthan in earlier times, it is imperative

1965 -,--1975 1980 that its causes be carefully deter-mined. Only then can prompt action

SOurce. U S Bureau of Labor Statistics i be taken to 'turn things around.7

-1

db.

IV. THE PRODUCTIVITYPROBLEM EXPLORED

hat caused the slow-down? There is no single

cause for our lagging productivityperformance. But certainly a signifi-cant part of the problem relates to theslow growth in U.S. capital investmentin, new plants, equipment, andtechnology. If we continue to trail allour major trading partners in growthof investment as a percentage of GNP,we will lose Any technological advan-tages we now have, and'be forced torely on production techniques based

Figure 12

on outmoded equipment and ineffi-cient processes. It is oblvous that- a30-year-old plant is simply not as effi:dent as,ene that is 10 years old.While we have found ourselves tryingto operate with old aria- obsoleteplants, equipment, and processes, keytrading partners - especially WestGermany and Japan have rebuilttheir industriessince Wo War II, andhave kept them moderni d with thelatest technologies a d workermotivation methods.Ira effect, they have taken technologywe gave th'em and adapted it tomodern economic and social condi-tions. We have tended'to operate as if

it's "business as usual" 630 have notchanged suffi:ciently to meet thecompetitive needs of the.times 4Thus,part of our problem is Mane g emept's

-,increasing. aversion to risk and itsfocus on the short-run, abetted'by anUncertain economic environment'Part of our problem is caused by therequirementto use available capitalinvestment to meet pollution controland work-place safety regulations,and to replace inefficient energy in-tensive plants and equipfnent-essen-tial 'expenditures that do not add toproductivity.Another part of the problem is thelack of incentive to invest.

The Industry Compdsition of Slower Productivity Growth.: 1947-1979 vs. 1974- 1,179

Industry Productivity Growth1947-1979 1974-1979

Iron mining, usable'ore' 3 6Copper mining,

recoverable metal' 2 4Bituminous coal

and lignite mining' 3 3Nonmetallic minerals,

except fuels' 3 4Fluid milk 4 2 (1958-79)Canned fruits and vegetables 3.3 (1958 -7$)Flour and other

grain mill products 3 8Cereal breakfast foods 1 3 (1963.78)Rice milling 2.3 (1963.78)Blended and prepared flour 0 9 (1963-78)Wet ew milling 5 7 (1963.78)Prepare Needs for

animals and fowls 3 7 (1963-78)Bakery products 2 2Raw and refined cane sugar I; 3 (1958-78)Beet sugar , 2 6 (1958.78)Candy and other

confectionery products 3.7Malt beverages 5 6Bottled and canned soft drinks- 2,6Cigarettes, chewing and, '

smoking tobacco 1 5Cigars 5:0Hosiery 6.3Sawmills andplaning mills 2.3Venter and plywood 4 5 (1958-78)Wood household furniture 2.5 (1958-78)Upholstered household

furniture 1 9 (1958.78)Metal household furniture 2.3 (1958-78)Mattresses aid bedsprings 4.0 (1958-78)Paper, paperboard,

and pulp Mills ) 3 9'Paper and plastic bags - 2.9 (1954-78)Folding paperboard boxes 2 2 (1963.79)Corrugated and solid fiber

. boxes 3.7 (1958.78)Synthetic fibers 6 4 (1957.79)Pharmaceutical preparations 4 4 (1963-79)Sciaps and detergents 2.9 (1958.78)Paints and allied products 2 9 (1958.79)Petroleum refining 5.0Tires and miter tubes 3.7

(1958 -79)

19

6 8

-2 6

2 13 72 3 (1974-78)

541.6 (1974-78)0.9 (1974-78)

-6.4 (1974-78)'9.0 (1974-78),

2 6 (1974-78)1.22 8 (1974-78)1.4 ('974-78)

2.65.15 5

3 0'2.85 60 83.3 (1974-78)1 0 (1974-78)

3.9 (197448)2.0 (19;4-78)2 2 (1974-78)

3 40 5 (1974.78)0.9.

1.5'0974-7.8)7 81 20.2 (1974.78)4 02.7i

Ei't

Industry

FootwearGlass containers`Hydraulic cementStructural clay productsBrAck and structural clay tileClay refractories

r Concrete productsReady-mixed concreteGray iron.foundriesSteel foundriesPrimary copperPrimary aluminumCopper rolling and drawing;Aluminum rolling and drawingMetal cansFabricated structural metalConstruction machinery

and equipmentBall and roller bearingsMotors and generatorsHousehold cooking equipmentHousehold refrigerators

and freezersHousehold laundry equiprfientOther household appliancesElectric lamps

' Lighting fixturesRadio and television

receiving *ptsMotor vehicles

and equipmentRailroad transportation,

revenueBus carriers, Class IPetroleum pipelinesTelephone communicationsElectric utilitiesGas utilitiesRetail food storesFranchised nevyucar dealersGasoline service stationsEating and drinking places

. Drug and proprietary storesHotel, motels,

, and tourist courtsLaundry and cleaning services

5.5 (19,58-79)4 6 (1g'58-79)3.7 (1958-79)2.0 (1954-79)2.6 (1961;78)

4.1 (1958-19)

3 4 (1957 -79)

4.7047162513.11623400546

(1954-79)11958.79)(1951.79)(1958.79)(1958:79)(1958-79)(1958,79)(1958.79)(1958.79)(1958.79)

1 7 (1958.79) 0.51.3 (1958-79) 0 3

40o'

3.5

3.7-0 9

1.97:319

-0 2-0 9

1447

-2.4110

Productivity Growth1947-1979 19744979

1.0 1 019 113.8 2 93 3 (1958-79) 2 42,8 (1958-79) -0.33 1 (1958.79) 0 53 0 1.31 5 (1958.78) 0.. (1974 -'8)2 3 (1954-79) 1 11.2 (1954-79) .-3 117 5235 111 9 (1958.79)* . 4'25.1 (1958-79) 1.82.3 (1947-78) X51 (1974-78),'1 2 (1958-79) 0 0

1 9 (1.958-79) 0.7,2 7 (1958.79) 0.73.1 (1954-79) 0.93 5 (1958-79) 0.3 -

3037413.63.0 (1974-78).,

'Productivity is calculated on the basis of output per hour per production worket, rather than per all emplOyeesSourck U S Bureau of Labor Statistics, Productivity Indexes for SeleVtid Industries 1954- 1979, April, 1981.

8

12

hat's happened to in-.vestment incentives?

_In a market ed)nomy, most transac-tions take place in respOnseto incen-tives. Producers purchaseditidnalcapital goods when the rate of profitis-expected to exceedretuvs:On avail-.able alternatives It is-904 ly believedthat the threshold rear:h. required be-fore producers are'willing to investhas rise in ,recent years, because ofrisesuncertainties induced by inflation,economic nsfability, and governmentregularonYou c see froM Figure 13 tha'c thereturryon depreciable asst ts 'fiarti19550,w averaged 13 0% anddrop0Orelow 10% only in the recksi,cit4ear ,of 1958. During the 1970's,hpiNeVer,, it averaged 9.7% Yet, therelationship between depreciableasset and bond yields is even moreo startling.. Before 1969, depreciable as-sets returned no less than 6% and oc-casionally more than 10% in excess of"riskless" U.S. Treasury issues. Begin-ning i% 1969 this pattern was brokenAs the 1970's proceeded, depreciableass *came markedly less attractiverelate to this gilt-edged investment

/-....By 1 the relationship had re-versed. i re actually higher onTreasury securities thin on productive

',asse0 Treasury bind yields and a-recession- induced decline. in corpo-rate profits .strongly suggest evenworse results for 1980.The ratio of market value to replace-ment cost of net assets (Tobin's q)-

saHo shown in Figure 13-measuresthe trade-off between new invest-ment and acqUii'ition. When the ratiois above 1.0, the market values finan-cial assets of firms more than the re-placement cost of their physical-assets.Thus, it should be cheaper to invest in' new equipment and-plant, ratherthan acquiring the physical assets ofan existing firm. A ratio below 1,0suggests that it is cheaper-to acquireexisting assets. . .The plunging q after 1973 provides arationale for4he,observed increase incorporate acquisitions, which-doubt-less 'discouraged some new invest-ment. Withbut an increase in the fi-nancial return to investment and amore positive market' evaluation ofcorpfrate prospects, it is unlikely that.the private sector an revitalize itself.Not only has t ncentive to invest'beentlimmis'h , but increased financial deteriorationjs eroding even t 'hecapacity to investFrom Figure 14, you cansee that cashflow, -a measure of internally gener-at d funds that can be used tolinancenew i tments, fell sharply as a per-cent of P after 1968. For 1955-1969,

Figure 13

The AttraCtiveness of Investingin 'Depreciable Assets:1955-1980

Year Rate.of Returnon Depreciable

Assets'(1)

Rate of Returnon 10-YearTreasury

Securities (2)

.DifferenceBetwegn

(1) and (2)

o of Market- Value toReplacement

Cost of Net Assets'

1955 ¶4.3 2.82 11 48 0.8551956 12.2 3.18 9 02 0 8371957 11.1. 3 65 7 45 0 7751958 95 3.32 6 18 0 8101959 12.2 4 33 7 87 0.9771960 11 1 4.12 6.98 0 9541'961 11.2 3.88 7 32 1.0551962 12.9 3.95 8 95 0 9981963 13.8 4.00 9,80 1.0961954 . 14.7 4.19 10.51 1.1741965 16 1 4.28 11 82 1.2471966 15,8 4.92 10.88 1 1261967 14.0 5 07 $ 1.1381968 138 5.65 8.15 1.1741969 12 1 6.67 5 43 `1.0531970 9.5 7.35 2.15 0 8611971 10 1 6 16 3 94 0 9391972 10.7 621 4.49 1.0111973 106 '6.84 3 76 0 9321974 81 7 56 0 54 0 6661975 88 7 99 081 0 6581976 96 7 61 1 99 0 7431977 10.1 7 42 2 68 0 6561978 99 8.41 1.49 0 6061979 90 9.44 -0 44 0.5611980 N/A 11.46 N/A N/A

The return on depreciable assets is the sury. f pre-tax profits, the capital consumptionand inventory valuation adjustments, plus net interest paid divided by the currentreplacement cost of depreciable assets Financial corporate assets are excluded'Market valare of equity and interest-bearing debt divided by the current replacementcost of net assets

Source Economic Report of the President 1981, Table B-65 (bond yields), p 309, andTable B-86 (depreciable assets and net assets ratio), p. 331

Figure 14

Cash Flow as a Percent of GNP: 1955-198011.0

10.6

10.0

9.0

8.0

7.01955. 1960 1965 1970 1975 1980

Source. Economic Report of the President. 1981, Table B-86, p 331

9

gt

it averaged 9.44, whereas the aver-age was 8 6% in the years 1970-1980.Other things. unchanged, a fallingcash flow means that corporate oper-ations are generating fewer fundsthrough profits and capital cost re-covery allowances This implies a needfor 'more equity or debt financing tomaintain a given rate of expendituresBut other thipgswere not unchangedDu1Sng the 1970's stock prices fell. As aresult, equity financingNbeca me sounattractive that new issues almostceased for several years Con-sequently, firms went heavily intodebt, increasing their fixed costs andvulnerability.to unexpected eventsWith declining return5.,on investmentand detenoratin,g corporate balancesheets, it is not sLfrpnsing that our cap-ital spending performance has fallenshort of our past efforts and those ofour trade competitors Without sub-stantial increases in profitability andfinancial flows to corporations, theU S cannot expect to raise investmentmaterially from its present lacklusterpace

hat \do the expertssay? The search for causes

of the productivity problem is a rela-tively new effort among economists.There is not yet a large and acceptedbody of information on the problem.The experts are just coming to gripswith it. Their studies are becomingmore sophisticated, but the subject isvery complex and there is much morework to be done.To date, the experts have -used a vari-ety of statistical techniques to studysom e 25 factors that they believe havecontributed to the decline of produc-tivity growth. They are.

1 Labor market tightness2 Cyclical effects3 Weather, work stoppages4. Shifts from manufacturing

vices5. Shifts from farm to non-farm em-

ployment6. Shifts out of self-employment7. Changes in hours worked8. Labor force composition9. Education

10 Health and vitality11., Nonresidential structures and

equipment12. Inventories13. Other capital14. Economies of scale15. Land16 Energy prices17 Pollution abatement18 Other regulations19. Government services

'20 Taxes21 Expectations22 Formal advances in knowledge

23 Informal advances in knowledge "24. Diffusion of knowledge25 Residual factorsEach expert has evaluated theireffectplus or minuson the overallproductivity growth rate and, asmight be expected, there is a wide-spread disparity in the estimates. Thevariations result from differences inthe time frames studied, differenteconomic perspectives built into themodels, and different questions askeliby*the researchers. ,In additionas lengthy as the list is,there are other contributing fact6rsthat should be consideredbut theyhave not yet been quantified, or can-not be.They include. tax disincentives to cap-ital formation and work effort, achange in the work- ethic, manage-ment deficiencies, measurement errorsand insufficient coverage of the eccig-omy, slower potential economicgrowth from increasing resource con-stramts, and the difficulty of measur-ing output in today's economy with itsgrowing service/knowledge character.As complex and uncertain as thecauses of the productivity problemmay appear, there are a number ofareas of agreement And it is on themthat we can focus our attention.

V. THE ROADTO RECOVERY

ow can we come to gripswith the productivisy

problem? The many different fac-tors that impact on productivitygrowth can be grouped into threemain categories:

Those that represent bread socialchanges that are difficult to meas-ure, and even more difficult to con-trol or change . efor example, ere shift to a ser-vice/knowledge economy, the in-flux of unskilled and inexperiencedpeople in the labor force, a changein the work ethic.Those that can be changed andshould be the responsibility of theprivate sector . . .for example, management ap-proa0es tothe changed characterof tocfQy's work force, the adversaryrelationships between manage-ment and labor, the tendency -pfmanagement to focus on short-range objectives at the'expense ofmore productive long-rangeachievements, and union "make-work" provisions.Those that can be affected bychanges in public policy . . ,for example, double-digit infla4n,the burderibtLaxation, restrictiveregulations, and the regulatoryprocess itself.

hat changes must theprivate sector make?

e is a growing consensus amongexperts that the fundamental produc-tivity problem rests with the privatesectorand that Significant changesmust be made if a healthy productivitygrowth rate is to be restored. Theseinclude changing management andlabor attitudes that inhibit productiv-ity growth, and learning how to oper-ate efficiently despite a change in thework ethic that many productivityanalysts cite. We are simply not work-ing with people prOperly Our workforce has changedbut managementhas not yet changed with it What weare doing now has simply not beeheffective

Management is beginning To learnsomething from the techniques used

,.by the Japanese including greateremphasis on programs that enrich thequality of worklife There is evidencethat American workers respond tothese techniques

Management must also make othercha n ges tf productivity growth rs to berestored Decision-making mustreemphasize perspectives that fostergreater long-term profitability and

klace less stress on short-term earn-Tlgs. Corporate growth from produc-tive investment must be stressed,rather than such great emphasis' on

meripers, diversification, and integra-tion. Management must become rela-tively more aware of the importanceof production and technology, andfocus less on risk minimization.

More R & D is needed to improve pro-cesses of production. New lines ofbusiness must be stressed, instead ofrelying so strongly on approaches thatinvolve new pack-aging, superficialproduct changes, heavy developmentbudgets, and low budgets for basicresearch.

Such changes may require a re-ordering of managerial experience,which has increasingly emphasized fi-nancial and legal expertise instead ofengineering. Strategic decision-making should be encchurged to im-prove dynamic efficiency and compet-itive strength by producing superiorgoods and services

Perhaps most of all, managersshould be encouraged to developmore of an entrepreneurial approachto their jobs,. More confidence isneeded to deal realistically with theproductivity problem, to institute newconcepts and ideas, to look ahead tothe future and take actions accord-ingly. This may even include revisingtraditional .concepts of growth andprofit levels.

10 1 4

41*

. .

hat role can the gov-,. ernment play? Govern-

; .'ment actions can complement andenhance. private sector initiatives inrestoring healthy productivity growthin many areas. While not a substitutefor private sector initiative, public pol-icy can actin two ways to improveproductivity growth 7First, and most important, continuityin economic policy is essential tocapital formation and long-rundecision-making Setting a,riclInain-tainin,g long -rUn monetary growthtargets are critical in this regard. Strictcontrols on government spendingwould also afford a measure of con-tinuity in public policy.Second, removing public policy bar-ners,to productivity growth is an im-portant step ,government can take.Such barriers include regulatory'andtax disincentives Lo productive in-vestment, and pricing policies that re-duce economic efficiency by distort -

prices from their market values.The U.S Chamber of Commerce be-lieves that the peopte-bf this nationcan no longer delay a confrontationwith the productivity .challenge. Pub:lic pobcy has a direct effect on produclto/Ay, and therefore on the livingstandards of the people of America.On their behalf,-the Chamber is com-mitted to .an advocacy role in publicand private forums, to encourage newpaticiet that will enhance U.S. produc-tivity performance. This effort is coor-dinated and directed by the'Chamber's Productivity CenterThe roductivity pro ble' has beenbuil g for more than a decade.

is no "quick fix" solutionemporary ot emergency programs, to

eet special., needs. Rather, theproblem calls for systematic and

-damental changes in the nation'soverall economic environment, thenatron 's tax system, Arid the regula-tory process, especially as it has of -,fected energy.We can adjust policies that contribute.to inflatiowapd uncertainty.The link bgriveen productivity and in-flation usually refers to the impact ofchanges in produci&ity on inflation.There's a link betweerighe slowdownin productivity grcAth in the 1970'sand the resulting accet4rapon in infla-tion Clearly,. howeferi. 'far more im-portant factors affet- the rate of in-flation than changes invproductivity.But the qUestiOn has been askedisthere a reverse link? Does rapid in-flation cause productivity growth todecline?

3

At least one study isolates inflation asthe most important single factor af-fecting productivity performance in

rec r? ears. While no quantative es-t' ate has been made, and perhapscannot be made, a strong theoreticalcase exists for this view.First, the acceleration of inflation andthe slowdOwn in productivity growthoccurred virtually simultaneously.Second, the government's uncertainmonetary policies aimed at control-ling inflation took the f m of con -stantstimulation and the,testrictionof the econoniy,duringt the businesscycle, leading to \harp swings in eco-nomic performance. This unpredicta-ble stop-and-go action caused lowerplant utilization 'during those timeswhen the economy was being artifi-cially slowed thereby reducing pro-ductivity.Federal spending has continued to ex-ceed revenues, creating huge budgetdeficits Tat crowd out productive pri-vate iMestment.Other effects of inflation on efficiencyand incentives are undoubtedly im-portant Inflation increases the cost ofassembling information for monitor-rig, and managing business,perform-ance It reduces We incentive to makesignificant commitments to researchand -development, increases the un-certainty and nsk ,in long-range in-estment compared to speculative fi-

ncial activity, and tends to deflateth measure of output.With such an unstable and inflation-ary economic environment, busi-nesses are reluctant to make long-term investment commitments. a

Think about your own situationhowis inflation affecting your business or-ganization, Your personal life? Isn't rtime to do something about it?We can review tax policy as Effectscapital investment.For the past decade or more, theUnited States has had a very poor c-)ord regarding capital formation. Theproblem is caused in part by a tax sys-tem that is biased against investment.Tax rates on investment income arehigher than for wages and salaries.High\corporate tax rates lead to a verylow rate of return on productive in-vestment and cause cash flow todwindle. Deprecation provisions areinadequate. Corporate earnings paidoutto shareholdilis are taxed twice,once as corporate pcome and thenagain as dividends to the shareholder.In addition, rising earnings and theinflationary environment lead to cap-ital gains, which are taxed also.As has been shown, all of our majortrading partnerseven GreatBritainhave devoted a larger shareOf GNP to investment than we have.All have higher personal savings rates.Several have higher civilian researchand development investment ratios as

a percent of GNP And most haveplants and equipment that are signifi-cantly newer than ours. Analysts havefrequently cited our low rate, of in-vestment as a crucial factor account-ing for lagging U.S. productivity per-formance.

... as it'affects R & DIt is clear that, U.S companies musthave greater cash flow available forresearch and developmentbasic, aswell as applied At the present time,the trend in industry is tause theR & Dmoney that is,available for applied re-search instead of basic research this isan ominous shift because'it meansfewer fundamental breakthroughs inthe years ahead. This will be the caseuntil changes are made in our tax sys-tem to,permit,a greater return on in-vestment.Considet how tax policiesaffect you!Isn't it time to take some action?

We can look carefully at regulatorypolicy affecting investment and R & D.It seertis clear that the dramatic na-tional decline in productivity growthsince the late 1960's came about inpart because of the proliferation offederal laws and regulations dealingwith health, safety, the environment,and energy. Little thought was givento the economic consequences oftheir enactment. Yet, the total cost ofregulation in one year (1980) has beenestimated at $126 billion. Compliancecosts totalled $120 billion, and an ad-ditional $6 billion- was spent on ad-ministrative costs. Civilian researchand development has become less ef-fective at promotjg productivitygains, because companies need todivert R & D resources to defend andprove product claims, as required bygovernment regulations.Regulations have had a ,particularlysevere impact on certain specific in-dustries Environmental Jegulationshave required huge expendituresfrorri the copper, coal, iron and steel,chemicals, paper, and oil refining in-dustries. Productivity growth in min-in9 began to decline in 1969 when theFederal Coal Mine Health and SafetyAct was pas.sed. It has fallen rapidly inrecent years, even as more coal hasbeen mined in response to the energycrisis and the high cost of oil. Produc-tivity growth in transportation hasfallen off significantly since 1973,partly because of EPA regulations, aswell as rising energy prices.Think about your own organization,and how government regulatory pol-ides are affecting it Isn't it time for achange.?

Regulations have contributed to ourenergy problem . , .The impact of government regular

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tions has been especially severe onenergy-intensive iridustriesbecauseof the added burden imposed by highenergy prices.The slowdown in productivity growthparalleli the OPEC-induced increasesin world energy prices that started in1973. Studies where the main produc-tivity effect of energy is presumed tobe its impact on capital formationconclude that one-third to one-half ofthe capital.effect in declining produc-tivity growth is due to energy. Highenergy prices have affected thecapital-labor ratio, by increasing thecost of production. Energy-intensiveplants and equipment have- beenmade obsolete. While many com-panies are investing in more energy-efficient plants and processes, manyotti ers "trate been reluctant to makethe investment because of inflationand generally uncertain economicconditions. Consequently, there hasbeen a tendency to substitute` laborfor capital and energy, resulting inlower productivity.Government laws .And regulationscontributing to the problem includethe Clean Air Act, the Clear Water Act,the Fuel Use Act, the Natural.Gas Pol-icy Act, the National Energy and Con-

. servation Act, and nuclear.safety reg-ulations. All have imposed severerestraints on the development andproduction of energy and have playeda role in restricting productivitygrowth The cost of meeting govern-ment regulations in the area ofhealth, safety, and the environmentaddlo the problem.

Here's' what canand mustbedone. .The U.S. Chamber recommends thefogowing atons as a way to reverse-the slowdo of productivity growth,restore vigor to the American econ-omy, and improve the standard of liv-ing of the peiSple:1 Provide tax relief for business and

individuals, including a revised cap-ital cost recovery system, reductionin the marginal income tax ratesapplked to individuals and corpo-rations, an end to double taxationof corporate income, and reduc-tion in the 'capital gains tax rate.

2. Reduce inflationary pressures onthe economy, by stable moneygrowth and significant cuts in fed-eral spending.

3. Revamp or repeal specific regula-tions that are:counter-productiveorcost- ineffective; reforfn'the en-tire regulatory process to preventexcessively restrictive regulationsfrom being inflicted on the pro-ductive part of the economy; andestablish a consistent energy policythat,develops our own energy Fp-

Sources, removes price controls onenergy supplies, and provides formultike-iJse of federal land.

For a list of current bills before Con-gress which would held accomplishthese objectives, call or write the U.S.Chamber's Productivity Center.

Aan we do the.Job? Wecanwith the help of all con-

cerned Americans. A massive effort isunderway to change the direction wehave been moving for the past decadeor so, to reverse the declining trend inproductivity. It's an effort that every-one can jOin, for our standard of livingis at stake.

The charts, graphs, and tables lay it allout for everyone to see. And yet, thebars and lines and numbers reflectwhat every person can,tell from hisgrocery bill, or on the gas pump, or atthe clothing stare. They say that weare losing ground to inflationand ithas to be brought to a stop. Takingsteps to increase the growth orpro-ductivity is one way this can be done:We have created the problem for our-selves. We believed our great systemof private enterprise .could continueto carry us to higher and higherstandards of living. We thought wecould do it and still support well-meaning but enormously expensivesocial and environmental objectives.We shackled the system with taxesand regulations that kept it fromfunctioning efficiently. Wkcreated anunstable economic environment thatmade long-rirvge planning difficult orimpossible. In essence, we made it vir-tually impossible to support ourselvesin the style to which we had grownaccustomed.Nowweare setting out together tochange all that.The U.S. Chamber of Commerce andits Productivity Center, are taking akiadership role in he attack. And all

mericans are invited to take parr.Keep up with proposed legislation af-fecting productivity, and let yourelected representatives know yourconcern. If you are in, a position tomake your company more productive,do so. If you are a public official, speakout. Let everyone know that changesmust be made in the way we do busi-ness. Many of the old ways simplywon't work any more.We must change our policies and ourways. When these changes are made,.it is the people of America who willbenefit.

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AppendixA. Tables of Supporting DataTabl A-1 Table A -2Figure 2 .Frg:ure 6

1.4

A

Real Spendable Ave ageWeekly Earnings:<

-1947 =1980

U.S. Spending on Research and Development: 1953-1979(As .3 P6rcent of GNP)

Year

TotalDefense and

CivilianTot 4,

Civillin IndustryFederal

NondefenseUniversitiesand Others

(In 1967 Dollars)

Weekly WeeklyYear Earnings Year Earnings 1953 1.40 0.72 0.61 0.07 I 0.041947 $66.73 1964 $88.88 0954 1.54 0.77 0.64 ... 0.09 0.041948 67.28 1965 91.67 1955 1 55 0.78 0.63 0 12 0.031949 69.66 , 1966 91.21 1956 1.99 1.00 0.79 0.16 0.051950 72.18 1967 90.86 1957 2.20' 1,00 0.78 0.18- 0.04

t 1951 71.71 1968 91.44 1958 2.39 1.10 0.83 0.22 0.051952 .72.79 1969 91.07 1959 2.54 1.09 0.84 0.20 0 051953 '75.29- 1970 90.20 1960 2.67 1,21 0.89 0 27 0.051954 75.59 1971 92.69 1961

-19622.74' 1.22 091 0.25 0.06'

1955. 79.06 1972 97.11 2.73 1.22 0.91 0.25 0.061956 80.86 1973 95.70 1963 2.87 1.30 0.92 0.31 0.071957 80.32 1974 91.14 '1964 2.97 1.30 0.93 0.30 0 071958 79.80 1975 90.35 1965 291 1.34 0 95 % 0.32 0.071959 82 31 1976 91.42 1966, 2.90 1.42 0.97' 0.38 0.071960 02.25 1977 93.63 1967 2.91 1.48 1.02 0 39 0 071961 83 13 1978 92.54 1968 2 83 1.50 1.04 0.39 0.07

962 84.78 1979 89.41 1969 2.74 1.51 1.07 0.36 0 081963 \§5.67 1981:1 83.11 1970 2 64 , 1.52 1 06 0.37 0.09

1971' 2.50 1.48 1.02 0.38 - 0.08Source. U S Burgau of Labor Statistics, as 1972 2.43 1.44 1.00.......- 0.36 0,08found in Employment and Training Report. 1973 2.34 0.35 ) 6..o7of the President, September, 1980 Table1.974 2.32 130 1.05 0.a7 0:08C-11.1975 2.30 1.50 1.03 0.39 Q:081976 2.28 1.51 1.05 0.38 0.081977 2.26 1.50 1.04 0.39 0.071978 2.27 ' 1.52 1.05 0.38 0.091979 2.29 1.54 1 08 0.38 0.08

Source: National Science Foundation, National Patterns of R&D Resources, as presentedby George Carlson, Office of Tax Arialysis, Office of the Secretary of theTreasury, January6, 1981.

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Table A-3

Figure 9

Growth Rateof the RealNet Capital- Stock:1948-1979

(Net Stock of Fixed NonresidentialPrivate Capital in f972 Dollars)

Growth : GrowthYear Rate . Year . Rate

1948 8.0 1966 6.71949 4 7 1967 5.4

t% 1950 5.0 1968 5.1

1951 5.0, 1969 5.41952 3.9 1970 4.21953 4.3 1.971 3 3

.. 1954 3 4 1972 3.9

'1955 4.3 1973 5.21956 4.5 197'4 4.31957 41 19l`75 2.11958 2.3 19 6 2.21959 2.8 19 3.11960 3.2 1978 3.71961 ,2.8 1979 4.0.1262 3.5 1948-1958 4.51963 3 5 1959-1969 441964 4.4 1970-1979 3.61965 6.0

Source U S Department of Commerce,Survey of Current Business, February 1981,p 60.

.

..-

°

Table A-4 P Table A--5

Figure 11 Figt(ire 14

Average Age of U.S.Equipment and Structures:

6.st Flow as a Percent of/GNP: 1955-1980

1925-1980Cash Flow Cash Flow

Year. Equipment Structure As A As Ax,"Percent 4, Percent

1925 8.54 18.0 Year of GNP Year of GNP1926 8:52 17. :1927 8 55 17 0 1955 9.3 1968 9.4.1928 8.59 1 1956 8 9 1969 8.61929 8.55

.59i .44 1957 8.9 1970 .7.8

1930 8.67 17.43 1958 8.6 1971* &31931 8.97 °,? 17.67 1959 9.3 1972 8.61932 1 : 9.40 f / 18.09 1960 8.9 1973 8..01933 I 9.81 I 18.55 1961 8.8 1974 7.0'1934 i 10.08 18 99 1962 9 5 %1975 '9.01935 10.18 19.38 1963 9 7 1976 9.31936 10.08 19.66 1964 10 1 1977 9.61937 9.83 .19.82 1965 10 6 1978 9.31938 9.81 20.06 1966 10.4 1979 8.91939 9.69 20.28 1967 10.0 1980 8.719401941

9.388.97

.20.4320.46

Source EconomiAport of the President:1981, Table B-86, p 331

1942 8.93 20.741943 8.90 , 21.141944 8.70 2 471945 8.26 2f.64.64

1946 7.80 2 .1919471948

7.116.65

20.8220.43

1949 6.48 20.11, 1950 6.35 19.77

1951 6.30 19.38-1952 6.35 19.02,

1953 6.39 18.621954 6.53 18.211955 6.61 17.791956 6-.70 17.281957: 6.7819581959

6 957.05

1166849

16 171960 7.13 15.851961 7.23 15.551962 t 7.25 15 261963 , , 7.25 15.031964 7:18 14.771965 7.02 14.451966 6.82 14,141967 (--- 6.69 13.931968 6.59 13.761969 ' 6.49 '13.591970 6.46 13.501971 6.47 13.451972 6.45 13.421973 ' , 6.34 13 381974 6.29 13 411975 6.35 13.531976 6.39 13.661977 6.38 13.791978 6.35 13.891979 6.32 13.941980 6.35 ' 14.02

Sourcr U.S. Bureau of Labor Statistics.

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