How Improving Productivity May Boost The Recovery

The Wall Street Journal Real Time Economics site is reporting some surprising productivity numbers. They report these by Presidential terms so don’t blame me for the context.

It seems that during the Bush Presidency productivity grew at an annual rate of 2.6%, versus 2% during Clinton’s term and 1.6% under Reagan. Now we all know that Presidents have little or nothing to do with this so ignore the political spin they put on it and think about the numbers.

Economists think that the growth in productivity is the result of the application of new technologies to business. They also see a potential silver lining to the recessionary cloud we currently live under as a result of these productivity gains. Read the article for the whole explanation but in summary here are the two potential benefits.

  1. Productivity made it easier for companies to shed workers as the economic outlook darkened this year. They could cut quickly without putting an equal amount of potential output in jeopardy. If that is what happened, they may hire more quickly as soon as things start looking better.
  2. Enhanced productivity helps put a lid on inflation. This might help as the Obama team has to shift from printing money to mopping up what it has injected into the economy once things start to turn.

The productivity figures might be one part of an explanation for the speed of the decline in economies worldwide. I’ve remarked before, as have others, that one of the remarkable aspects of this recession has been the speed with which economies all over the globe retracted. Essentially, we seem to have traversed ground that it took 3 years to cover in the run-up to the Great Depression. There are undoubtedly a lot of reasons that happened and most of them are yet to be defined but greater flexibility in the private sector due to improved productivity no doubt contributed its share.

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