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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

March 10th, 2011 2:46 PM

Who reaps the rewards of productivity?

A 10% increase in productivity since 2008 is enough to cancel concerns about the deficit. But who gains is the crucial question

Washington politicians, like politicians everywhere in the west, have been running around with shrill cries about how we are adding trillions of dollars to the national debt and that this burden will impoverish our children and grandchildren. It is almost impossible to pick up a newspaper or listen to a news show without hearing such whining.

By contrast, next to no one knows that productivity has increased by almost 10% since the start of the recession. This is too bad, because this increase in productivity will matter far more to the wellbeing of our children and grandchildren than the trillions of dollars of debt that are getting our politicians so excited.

Productivity matters for the prosperity of children because it measures the amount that an average worker produces in an hour of work. If productivity rises by 10% over three years, that means that we can produce 10% more output with the same amount of work than we could three years ago. The size of the economy was roughly $14tn three years. A 10% rise in productivity means that we can produce approximately $1.4tn more this year with the same amount of work. This would come to an additional $18,000 a year for an average family of four.

Alternatively, a 10% rise in productivity would mean that we could produce the same amount of output as we did three years ago, while working 10% less time. We could reduce our 40-hour working week to 36 hours, or we could all take an additional 5 weeks a year of vacation – and still have as much to consume as we did three years ago.

Unfortunately, most workers are not seeing the benefit of these gains in productivity. There are two reasons why workers are not benefiting. First, the country has seen an enormous upward redistribution of income over the last three decades. As a result of this redistribution, most workers have seen very little benefit from their productivity growth. The big winners have been highly-paid professionals like doctors and lawyers, corporate CEOs and their sidekicks, and, of course, the Wall Street gang.

The other reason that workers have not seen much benefit from the 10% rise in productivity over the last three years is the recession. As a result of the recession, the economy is operating well below its potential level of output. The problem right now is that there is not enough demand in the economy, not a lack of supply. In a recession, more productivity is not very helpful. If a carmaker can meet its demand for cars by hiring 20% fewer workers, it is likely to mean that more workers go unemployed.

This gets us back to the deficit. The government is helping to support demand in the economy with its deficit. If we found $1.5tn in completely wasteful spending and eliminated it tomorrow, it would drastically reduce demand in the economy and leave millions of additional workers unemployed. At this point, the politicians start screaming about the debt bankrupting our kids. The problem with this claim is that our kids will own the debt. At some point, all of us will be dead, meaning that the people who hold the bonds that constitute the debt will be our children and grandchildren.

How can holding government bonds make our children bankrupt? There can be distributional issues associated with the debt, but running a deficit to boost the economy and put their parents to work is not going to make our children poor.

The politicians often whine about the foreign ownership of government debt – those evil Chinese – but the issue here is the trade deficit, not the budget deficit. The Chinese and other foreigners accumulate dollars by selling more goods to us than we buy from them. This is the result of an overvalued currency, not the budget deficit. If these politicians were serious about this concern, they would be pushing for a lower-value dollar, not yapping about the budget deficit.

Virtually all economists agree that, in the long run, productivity is the main determinant of economic prosperity. This means that if we can sustain high rates of productivity growth, as we are now doing, then the economy will be able to provide our children and grandchildren with a prosperous future – one where they will be far richer, on average, than we are today.

Of course, if we continue to allow the Wall Street boys, the CEOs and their high-living friends to get the bulk of the gains from growth then our children and grandchildren will have much to worry about. But the problem then, as now, will not be the debt that we have left them.

The problem will be that we let the rich take over the country. If we leave the Wall Street crew in charge, then we will have done much to bankrupt our children.

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