Chapter 16. Economic Growth and Productivity

Chapter 16Economic Growth and Productivity16-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesEconomic growth in the United States: The recordThe role of productivityThe reasons our productivity has variedThe roles of savings, capital, and technologyThe declining quality of our labor forceEconomic growth in the less developed countriesThe Malthusian theory of population16-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic DevelopmentPrior to the Industrial RevolutionOld age began around your 40th birthdayYou lived and died within a few miles of where you were bornYou spent most of your time farmingYou were illiterate16-3 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic Development • The industrial revolution made possible sustained economic growth and rising living standards for the first time in history 16-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution began in England around the middle of the 18th century16-5 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic DevelopmentThe Industrial Revolution entered its second phase in America in the early years of the 20th centuryIt was based on the mass production of cars, electrical machinery, steel, oil, and chemicals16-6 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic DevelopmentSince the 1980s, the third phase of the Industrial Revolution has taken hold in Japan, Western Europe, and the newly industrialized countries of Southeast Asia as well as in the United StatesThis phase is based largely on consumer electronics, computer systems, communications systems, computer software, and advances in manufacturing processes16-7 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic DevelopmentSince the 1990s, we have been in the fourth phase of the Industrial Revolution, the information ageDuring this period nearly all business firms and most homes in the world’s industrial countries have computerized16-8 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Industrial Revolution and American Economic DevelopmentCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.16-9 Economic Growth During the Last MillenniumThe Record of Economic and Productivity Growth16-10 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Period Percentage change 1929-39 -6.1%1939-49 35.8%1949-59 23.2%1959-69 30.1%1969-79 18.6%1979-89 17.4%1989-99 12.2% Percentage Change in Per Capita Real GDP, Selected YearsThe Record of Economic and Productivity Growth16-11 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Annual Rate of Productivity Growth, 1960-2000The Record of Economic and Productivity Growth16-12 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.There is no one clear reason why our rate of productivity increase slowed in the 1970s and 1980s, but a reason singled out by many economists is our low savings rateLow savings rate means low productivity growthSaving as a Percentage of Disposable Income, 1980-2000The Me Generation and Generation XThe generations that came of age in the 1980s and 1990s have not done as well as their parents’ generationTheir rallying cry was, “I want it all and I want it now”They were born to shop and they believe you must “shop till you drop”Less than one-third can afford to buy a homeIn the 1960s most couples could afford to buy a homeReal wages are virtually the same as they were thirty years agoFamily incomes have risen only because so many homemakers have gone [back] to work 16-13 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.16-14 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.U.S. Gross Saving RateGross Saving as a Percentage of GDP, 1947-200016-15 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Gross National Saving as a Percentage of GDP: Annual AverageOrganization for Economic Cooperation and DevelopmentThe United States has had the lowest savings rate among the world’s seven leading industrial nations.16-16 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Capital Sending and Economic GrowthPanels A and B show identical production possibility curves in 1994 The nation that allocates the greater portion of its resources to capital goods has the greater economic growth in 200416-17 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Net National Saving and Net National InvestmentFrom 1960-2000 our net investment rate exceeded our net savings rateWe had to depend on foreign investors to provide us with some of their savings to make up the difference.Federal Reserve Chairman, Alan Greenspan, has repeatedly warned, foreigners will not be willing to accommodate us forever The Labor Force: Rising Quantity and Declining LaborIn 1870, Americans, Germans, French, Japanese, and British workers averaged nearly 3,000 hours a year on the jobNow it is less than 2000 hours, with much of the decline having come since World War IIHow does our labor force stack up against the rest of the world?16-18 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Average WorkweekToday, most people put in the standard nine to five (or eight to four) workday with an hour for lunchThis is 35 hours of work a weekIn 1900 the workweek was 60 hours16-19 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Average WorkweekMost full-time workers are guaranteed 10 paid holidays a yearVacation time, paid sick leave, and personal leave still has to be figured inAmericans work slightly more hours than do their counterparts in Japan and considerably more than those in Germany16-20 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Average WorkweekThe Labor Department measures the average workweek per job, not per workerIf you work 35 hours on one job and 25 hours on a second job, the Labor Department would say that you have an average work week of 30 hoursYou are actually working 60 hours16-21 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Average WorkweekThe typical married-couple family with children put in 256 more hours of work in 1999 than in 1989More people working more hours certainly raises outputBut, what does it do for productivity?We measure productivity as output per unit of input16-22 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Average WorkweekAs the unemployment rate declined in the late 1990s, some of the workers most recently hired – many of whom had recently left the welfare roles – were not as productive as the workers who had more work experience, education, and training16-23 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Declining Educational SystemBusiness firms are having trouble finding secretaries who can spell and put together grammatically correct sentencesLaw firms spend millions of dollars teaching their attorneys how to writeFast-food restaurant chains have found it necessary to place pictures on their cash registers because so many of their clerks are numerically challenged16-24 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Declining Educational SystemMore people than ever are attending college but our labor force is less well-educatedOur educational leaders figured out they could get more students through the educational system by lowering standardsThe quality of our labor force has been derided, especially in comparison with those of other leading industrial nations16-25 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Declining Educational SystemOur schools are failing us in an age when literacy, numerical skills, and problem solving ability are crucial in the workplaceMost high school students cannot do simple arithmetic without a calculatorWhen they enter college , one out of three freshman must enroll in at least one remedial courseIf this is “higher education” what must be happening at the lower levels? 16-26 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Declining Educational SystemDespite our educational problems, the United States must be doing something rightThe U.S. has less than 5% of the world’s population, but, in the 1990s, Americans won 59 percent of the Nobel prizes in economics, 59 percent in physics, and 60 percent in medicineThe U.S. is a world leader in computers, telecommunications, and financeClearly, the upper strata of our work force is very smart and well educatedBut what about the rest of us? 16-27 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Our Declining Educational SystemThere is virtual agreement that improving our educational system holds the key to high productivity growth and, ultimately, to a high rate of economic growth16-28 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Permanent Underclass: Poverty, Drugs, and CrimeThe United States has a permanent underclass constituting 10% of our populationThese people are supported by our tax dollars, and many are members of third-and-fourth-generation welfare familiesNo other industrialized nation in the world has such a large dependent population 16-29 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Permanent Underclass: Poverty, Drugs, and CrimeClosely associated with poverty are drugs and crimeAlthough poor people are much more likely to be afflicted by both drugs and crime, these problems also affect the lives of virtually every AmericanDrugs and crime have taken an enormous toll, both socially and economically16-30 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Permanent Underclass: Poverty, Drugs, and CrimePoverty amid plenty is an apt description of America todaySince the mid-1990sThe poverty rate is down sharplyThe welfare roles have been cut in halfThe crime rate has fallenSince these trends do tend to lessen during economic booms, it is too soon to tell whether these are the beginning of a long-term trend16-31 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Restrictions on ImmigrationThis country was built by immigrantsBefore the 1920s, virtually anyone who wanted to come to the United States couldIn the early years of the 20th century, nearly a million people came here each yearRestrictive immigration laws were passed to prevent further dilution of our vaunted northern European stock 16-32 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Restrictions on ImmigrationImmigrants are often willing to work 14 or 16 hours a day, seven days a weekWithin a couple of years, an immigrant has typically saved enough to open a small businessImmigrants may never get rich, but their children will go to college16-33 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Restrictions on ImmigrationToday, with immigration restricted to slightly over 300,000 people a year, we are deprived of much of what made our economy growIn recent years, nearly half the winners in a Westinghouse Talent Search competition were foreign born or children of immigrants 16-34 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Restrictions on ImmigrationA study by the National Academy of Sciences released in 1997 concluded that immigration added perhaps $10 billion a year to our GDPBut it did slightly reduce the wages and job opportunities of low-skilled American workers and temporarily placed a fiscal burden on state and local governments16-35 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Restrictions on ImmigrationWith unemployment rates at record lows in 1999 and 2000, many jobs, especially in high-tech fields, became difficult to fillOn the lower end of the job ladder were the nation’s six or seven million illegal immigrantsIf these immigrants were expelled tomorrow, thousands of restaurants, hotels, farms, poultry plants, and garment factories would be forced to close for lack of workersEven the Immigration and Naturalization Service (INS) has stopped trying to pick up illegal aliensA downturn in the economy could lead the INS to reverse this policy16-36 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Role of Technological ChangeTechnological change enables us to produce more output from the same package of resources, or, alternatively to produce the same output with fewer resourcesToyota, which uses robots extensively, produces half as many vehicles as general Motors with only 5 percent of GM’s number of workers16-37 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Role of Technological ChangeThe rate of technological change may well be the single most important determinant of a nation’s rate of economic growthA nation’s educational system plays a basic role in promoting a high rate of technological changeOver the last 15 years computer literacy has increased exponentially while basic reading, writing, and math skills have declined 16-38 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Role of Technological ChangeNobel Prize winner Robert Solow said in 1987, “you can see the computer age everywhere but in the productivity statistics”In 2000 he said, “you can now see computers in the productivity statistics”Between 1973 and 1995 the annual rate of productivity growth was about 1.5%, and it has more than doubledHow much of this increase was due to computerization?16-39 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Role of Technological ChangeStephen Oliner and Daniel Sichel, two economists at the Federal Reserve concluded that computers were responsible for as much as two-thirds of productivity increasesRobert Gordon of Northwestern University believes that labor productivity gains have been confined almost entirely to computer manufacturing and, more generally to durable goods manufacturing16-40 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Role of Technological ChangeCan these opposing views be reconciled?Perhaps the problem lies in productivity measurement itself, especially in the service industries, which are notoriously difficult to measureHow do we measure output at McDonald’s, Delta Airlines, or your family doctor?16-41 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Additional Factors Affecting Our Rate of Growth In the 1970s six other factors retarding our rate of economic growth came into playHigher energy costsEnvironmental protection requirementsHealth and safety regulationsRising health care costCrumbling infrastructureHigh military spending16-42 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.ConclusionWhy was our productivity growth so low from the mid-1970s to the mid-1990s and why did it pick up again?Our low savings rateOur low rate of investmentThe rising quantity of laborThe declining quality of laborThe growth of the permanent underclass and its attendant problems of poverty, drugs, and crimeRestrictions on immigrationComputerization16-43 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Productivity of Labor: An International ComparisonWhich country in the world has the highest productivity per worker?The United StatesOur lead was so big that even though a few other countries have been gaining, they haven’t caught quite us yet16-44 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Productivity of Labor: An International Comparison16-45 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Country Dollar value of good and services producedAmerican worker $49,000French worker $47,000German worker $44,200Japanese worker $38,200 Average full-time worker in 1990Two reasons that international comparisons of worker output are difficult are that (1) no two national accounting systems are identical and (2) there are daily fluctuations in the exchange rates among the world’s currencies16-46 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Retail Productivity in Japan versus the Same Type of Store in the U.S., 1999Based on operating income for each hour worked, Japanese retailing operates, on average, at about half the efficiency of American retailingEconomic Growth in the Less- Developed CountriesThe world can be divided into three groups of countriesThe industrialized nationsThe newly industrializing countries (NICs)The less developed countries (LDCs)Those who live in the LDCs are the people who really have problems16-47 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economic Growth in the Less- Developed CountriesThe big question is how to get from LDC to NIC and, ultimately to industrializedThe only way to industrialize is to build up capital in the form of new plant and equipmentThere are two main ways of doing this: working more and consuming lessSince the poor nations are barely at subsistence level it’s pretty hard for them to consume lessBecause there is often a great deal of unemployment in preponderantly agriculture economies, those who want to work more have a hard time finding work 16-48 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.16-49 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The 10 Richest Countries in the World, 2000The Malthusian Theory of Population16-50 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Malthusian theory predicted that famine would, within perhaps a few generations, beset the worldThis was inevitable because of a tendency for the world’s population to double every 25 yearsMalthus believed that the population tended to grow in a geometric progression – 1, 2, 4, 16, 32 – and that the food supply would tend to grow in an arithmetic progression – 1, 2, 3, 4, 5, 6He indicated that population increases could be checked by war, pestilence, famine, or moral restraintWas Malthus right? Surely not in the industrialized countriesTwo things happened to ward off Malthus’s dire predictionsBecause of tremendous technological advances in agriculture, farmers were able to feed many more peopleAs industrialization spread, more and more people left the country for the citiesBirth rates fell16-51 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Malthusian Theory of PopulationThe less-developed countries (LDCs) are caught in a bindThe Malthusian positive check of a high death rate has been largely removed by public health measuresBecause these countries have not yet been able to industrialize and urbanize their populations, birth rates remain highPopulations in LDCs are doubling every 30 to 35 years, putting hundreds of millions of people in peril of starvation16-52 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Malthusian Theory of PopulationMany LDCs clearly will never be able to begin industrializing without outside helpToday, more than two-thirds of the people in the world live in LDCs, and in those countries about half live at or near the subsistence level. Most live in abject poverty, with no hope that they or their children will have better lives16-53 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Malthusian Theory of Population