If you’ve been paying attention to the economic news over the past couple of decades — we’re talking here about long-term trends, not cyclical shifts — you know that one of the great disappointments is the lackluster performance of productivity. You’ll recall that productivity is economists’ jargon for what most people call efficiency. Productivity gains are the ultimate source of rising living standards, higher incomes and increased profits.
But lagging productivity growth is also connected, though less visibly, to our current economic crisis: the collapse of demand; the explosion in unemployment; and the accompanying political and social turmoil.
Companies with strong productivity growth, in effect, acquire insurance against setbacks. Too many U.S. firms don’t have this insurance. From 2007 to 2019, U.S. productivity growth has averaged about 1% per year, half the rate since 1948, according to the Bureau of Labor Statistics.
All sorts of theories have been advanced to explain lagging productivity, none of them fully satisfactory.
These include: poor schools (which don’t prepare workers for new technologies); growing income inequality (which means that most wage gains go to the top); and “off-shoring” of factory jobs (which diverts some productivity gains abroad).
The persistence of poor productivity has baffled most economists. What’s especially puzzling is the coincidence of poor productivity with the highly visible digital products and services. Logically — you would think — they should be boosting productivity. But just the opposite is happening. Reversing this shift is crucial for the economy’s long-term prospects, even assuming a recovery from the coronavirus collapse.
I have my own explanation of lagging productivity. It comes in two parts. First, the benefits of digital technologies have been diluted by the growing need to protect cyber networks from hackers and digital intruders of all sorts. The cost-benefit ratio of the internet is reduced by the constant and often-futile effort to shield these systems from bad actors, whether other governments, commercial rivals or terrorists.
The second part of the theory is more subtle. It suggests that the economy is operating under two overlapping systems. One is digital; the other is not — it is a legacy of the past.
Considered in isolation, the new digital systems can be highly efficient. But in the real world, companies and organizations have to maintain multiple systems that do, more or less, the same thing. Indeed, the digital system itself is fragmented. It has many different platforms. All this raises costs and subverts productivity, when it is viewed as combining old and new systems.
I like to use my business — the news business — to illustrate what I mean. Back in the good old days when newspapers were paper, the economics of the business were fairly straightforward. Now, they’re a muddle. The Washington Post still has a paper edition (though how long that will last is a mystery) as well as many digital distributional channels: desktops; laptops; smartphones.
Suddenly, the cost advantage of the digital world is no longer so compelling. With a moment’s reflection, you can easily identify other industries that rely on the dual nature of our production systems. To cite another example: Traditional retailers (Macy’s, Walmart) had to embrace online shopping, just as Amazon has diversified into grocery stores. All this duplication erodes economy-wide productivity.
At least, that’s what my theory stipulates.
What we are seeing now is the collision between the tidal wave of digital technologies and the coronavirus pandemic. It’s a coincidence, an accident. Still, the economy’s collapse and the onslaught of digital products and services are creating a giant economic purge. It’s survival of the fittest. Weaker firms cannot easily sustain themselves in such a hostile climate, even with generous government subsidies.
Don’t get me wrong. I’m not in favor of this. We would have been much better off with a gradual and messy transition to the digital world — what, in effect, we had before the coronavirus pandemic — than the calamity that has actually occurred. Competition is good, but what we have today is not ordinary competition. It’s annihilation.
Still, it’s important to understand how we got here and why. If there is a silver lining — and there may not be — the economy that emerges from this turbulence could be more resilient, productive and innovative than the one we have now.