People are concerned that the U.S. economy, visibly slowing before September 11, will fall deeper into recession because of the economic shocks from that day’s events.
Such fears are justified but probably overblown. The greater danger is that business will invest money in areas that don’t increase the nation’s productivity, such as security, and not in areas that do increase productivity, such as computer technology.
Minnesota state economist Tom Stinson raised the issue last week, citing estimates that higher security costs might hold back productivity growth by a full percentage point over the next two years.
Why is slower productivity growth more important than a recession and unemployment? Because it eventually lowers everyone’s standard of living.
Unemployment affects a minority of households significantly for much shorter periods and modern economies can easily buffer, though not erase, the social and economic hurt caused by unemployment. It’s still painful, but cyclical unemployment — the type caused by a recession rather than by long-term technological change — usually is limited in duration.
The effects of slower productivity growth are forever.
Yes, per capita output will continue to grow, though more slowly. Yes, our children will probably enjoy more goods and services than we do and our grandchildren will enjoy even more. But they won’t have as much as they might have had if output had continued to climb at the pace it did from 1945 through 1973 and from 1995 through 2000.
With exactly the same tax rates and spending programs, the high budget deficits of the late 1980s and early 1990s would have been surpluses if productivity growth had not taken a two-decade nosedive in 1973.
If output does not grow, the nation as a whole cannot have higher incomes or a higher material standard of living. And if productivity — output per worker — does not grow, neither can average personal income.
We still don’t know for sure why productivity growth abruptly took a 20-year powder in 1973. One factor probably was the economic uncertainty caused by high and rising inflation and the first oil price shock. Another factor may have been that companies began to spend increasingly large amounts of available capital on pollution control measures.
Economists who believe it was the latter acknowledge that reducing environmental damage did improve the well-being of society. That increase in well-being was not measured in GDP, however, which is a measure of output but not necessarily of well-being.
Most believe, however, that we could have had just as great an improvement in environmental quality at a lower cost if we had chosen wiser policies to reduce pollution and resource waste.
The danger we face now is analogous, yet different.
In the 1970s, when firms invested in pollution control devices, they were left with less money to spend on new, more efficient machinery, on research and development of new products and on worker training. The cost of mandated pollution-control devices was less productivity growth since innovation, new machinery and training are what drive productivity.
Now firms are choosing to spend money on security for their facilities and workers. What they might spend on research, for example, is instead being devoted to video surveillance hardware and the like.
Such expenditures may be warranted, but all they do is make the present less dangerous. They don’t create more output for the future. Any growth that takes place in each succeeding year will be from a smaller base than if the situation were different.
Security spending need not seriously diminish our current standard of living. But it will slow its improvement and the pain of slower growth usually hurts those who need growth the most, the poorer 20 or 40 percent of society, rather than the comfortably well off.
Our experience with pollution abatement expenditures in the 1970s teaches a further lesson: Even when some measure is patently necessary, it is important to look for efficient means to achieve necessary ends.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.