A New Productivity Revolution

One of the brighter but surprising elements of the current recession has been the resiliency of overall business productivity. The chart below illustrates the year-over-year change in U.S. productivity (output per person) since the 50s:

Source: Bureau of Labor Statistics

Note the downturns in productivity during recessions (complete list here): 1953/54, 1957/58, 1960/61, 1969/70, 1973/75, 1980, 1981/82, 1990/91, 2001. A decline in productivity is logical and to be expected in recessions. Against all odds, the current cycle has not seen a similar productivity drop. To be sure, manufacturing productivity is now distinctly negative, but the overall economy continues to see productivity gains.

The productivity gains are more than a mere curiosity. Productivity is one of the great drivers of economic growth. If there are fundamental factors supporting these gains, one could argue the case for a much more vigorous economic rebound than most forecasters (including me) expect. The steady gains from the 1990s have largely been attributed to new information technology and a managerial culture that supports and incentivizes its adoption. (see, for example, this thoughtful piece by Martin Feldstein). One would think that productivity gains from the adoption of information technology and incentive systems would have diminishing returns without significant new technological breakthroughs. Haven’t we all adopted the internet? Or could there be a whole new productivity revolution?

The productivity statistics suggest that something significant is happening. I believe there is the potential for a whole new round of efficiency gains to be won from creative new applications of internet and other existing communication technology. There’s a case to be made that the applications of this technology have only been enhancements of existing business models (e.g, electronic bill-pay is not so different from writing out checks, online retailers are not so different than catalog stores, etc.), and do not reflect the opportunities available in creating whole new ways of structuring businesses.

We will only know years hence whether such a technological revolution is in the works. However, I think a concrete example can illustrate this point. Consider the publishing/book-selling industry. Amazon.com, a truly impressive pioneer, and others have clearly added efficiencies to this business. However, at the end of the day, Amazon is just an online store structured much like any real world store — better prices and inventory perhaps, but similar nonetheless. Even the book recommendations and purchaser feedback is not all that dissimilar from bestseller lists and “staff picks” available at my local bookseller. But there are other ways, as yet unexplored, of restructuring this industry using technological advances.

I recently saw some press about a new publishing venture in New York, OR Books, founded by industry veterans John Oakes and Colin Robinson. John Oakes is a serial entrepeneur in that field and a longtime friend (see disclosures below). The two editors are seeking to completely remake the industry (video here). The industry, as presently contstructed, is fraught with inefficiencies:

• The biggest costs of book publishing revolve around the fact that publishers initially have no idea which books will sell.
• Publishers must go to the enormous expense of printing and distributing books. If they don’t sell, the publshing firms are then forced by the bookstores to accept the returns.
• This system produces uncertain financials for publishers, constrains marketing budgets, wastes bookstore shelf space with unwanted books, and results in long delays in royalties for even successful authors.

OR Books is seeking to build an alternative structure for the industry, first launching new books as “e-books,” to test demand. At least part of the savings from the forgone initial printing will be used for marketing and promotion. Once demand for the e-book version establishes interest in the text, then and only then will OR Books do a tradition print and distribution run. Not only should this eliminate print and distribution costs for unsaleable books, this also give OR Books better leverage in distribution terms with bookstores. Bookstores benefit by stocking books for which there’s known demand. Authors benefit from having more promotional dollars available to (electronically) launch their books. It seems probable that readers should benefit too from the opportunity to hear more about new authors. If successful, this could be not only a different, but a better way of publishing.

Although I wish them every success, I have absolutely no idea whether OR Books will succeed. This venture, however, forces us to consider that the productivity gains from telecommunication technology may have a long way to go. Certainly our unsinkable productivity numbers suggest something significant is going on in the economy. Capitalism has been famously described as “creative destruction.” The past 18 months have been focused only on the destruction element. Perhaps there’s hope to be found in capitalism’s essential creativity.

Disclosures: I have no investment opinion of OR Books, no personal or client direct interest in that or any other company in publishing/bookselling, and lest there be any confusion generated by John Oakes’ comments, I generally disagree with John’s politics as well!

Comments

[Dave Wrixon:]

It all boils down to Efficiency against Effectiveness.

The first is about doing the things you do quicker and cheaper. The second is more about doing the right things.

To put it a different way, figureing out how to turn more Hummers off the Hummer production line and thereby reducing the cost is no necessarily the answer the answer to the US Automobile Industries problem.

Jun 19 08:06 AM

[AmericanWorker:]

Jeffrey, If you actually worked in business you would know first hand why productivity has not dropped and wouldn't be writing so glowingly about it's statistical resilience.

It's always been true now even more so, now with health statistics reversing proving the point, Americans are worked to death. Corporations have taken advantage of the current job market and cut head count, pulled in delivery dates and clawed back wages. Gee, these guys are now an Economics geniuses! The media is guilty of not lifting the hood on the Econ statistic metrics. Not when wall street was disproportionately buoying the average annual pay and not when productivity is seemingly resilient.

curt

Jun 19 08:17 AM

[Ali Mogharabi:]

What you cited is correct. But I think its best to add another data point to this study - productivity per hour.

Common sense or logic would tell us that productivity per hour and per capita are very highly correlated ... and data supports that. HOWEVER, if you look this relationship during the last six months, it has actually begun to diverge. And such divergence was not evident in any of the other recessions.

And such divergence is, for the short-to-medium term, disturbing. It could be telling us that the unemployment situation will not get any better until at least 1 - 1.5 yrs from now; and that the 'normal' unemployment rate will likely end up being around 7-8%, which was the norm in the 80's.

This supports my view, which is that we are going through a true economic transition. Forget about the financial mkts, increasing regulations (with which I disagree) and all the other BS we see and hear from wackos like cramer or dennis on the entertainment capital of the world, CNBC. We need to realize that this is the beginning of a shift back to having manufacturing and true production drive our economic growth. Over the next 5-10 years, consumption will represent a lower % of GDP, while combined with the weaker dollar, under-utilized capacities and China and India's growth, other countries will begin to manufacture here in the US. Believe it or not, it is likely that auto manufacturing (for domestic ... if any ... and foreign companies) will come back to the US in five years. Just some thoughts.

Jun 19 09:10 AM

[Chris Butler_:]

First of all, thanks for the article Jeffrey. But I take exception with a previous comment from AmericanWorker. He's confused on a few points. (1) He writes, "If you worked in business..." The author's bio very explicitly informs us that he is in the investment management business. (2) "Americans are worked to death." And exactly how was this conclusion arrived at? Because one organization says Americans live, on average, a year less than the most healthy European nation? Since the average American life expectancy has done nothing but go up, by this logic, shouldn't Americans be working less over the last 100 years? Or, maybe all that nasty work has led to innovations which keep us living longer. (3) "Corporations have taken advantage of the current job market and cut head count." I'd hardly classify this as "taking advantage of" a bad economy. If hiring more people, or keeping the current workforce was profitable, I'd say they've made a terrible mistake. However, the goal of a business is to make profit - it's not to hire people. These businesses were forced to lay off workers as a means of survival. They obviously thought (and probably correctly) that retaining current employees was not contributing to that goal of survival. (4) Finally, and most importantly, AmericanWorker missed the point entirely. Productivity has very little to do with the number of people working. It's a ratio of output per unit of input, where labor is an input. This ratio does not have to get smaller in a recession, but usually does (I presume) because more is expected of less, which ends up hurting productivity, whether the input is labor or machinery.

Jun 19 09:27 AM

[logicalthought:]

I'm quite bearish on the economy (and thus the markets) for the next several years, but, that said, one never knows when a (good) black swan will arrive in the form of a game-changing industry or technology. All we know is that thanks to human inventiveness-- and despite the anti-business idiots in Washington-- such a game-changer inevitably WILL arrive. This is why the bears usually have the best "logical" case, while the bulls often have to rely on the much more amorphous "faith in human creativity", and yet we humans (well, smarter humans than I, anyway) always do seem to come up with something. So, I guess you can say that I'm bearish about the next three years, but bullish about the next 20.

Jun 19 10:27 AM

[max12345:]

Thank you for the article. It provides both a ray of truth and a ray of hope. We do NOT have to rely on yet another credit and spending binge to get out of recession. We can rely instead on improving national, industry, enterprise and individual level productivity across the board. Through innovation, new technology, better education, better training, more and better R& D, entrepreneurship and all of the other useful and productive things that will also raise our dignity level a notch....(from flipping houses, taking out home equity loans, loading up on credit card debt and etc. etc.)

When the going gets tough the tough get going. (they don't just start to borrow and spend themselves silly again)

Jun 19 10:32 AM

[Ferdinand E...:]

This bit about OR Books certainly sounds lovely. I've been writing on a novel for 30 years without getting a bite. Maybe the bells will ring for me this time. Of course the title - AMERICAN WAR - might put off a few potential readers.

Jun 19 10:45 AM

[Sovestor:]

Americans have been working hard for the longest time. They will continue to be productive.

Jun 19 11:06 AM

[billp37:]

OR looks to warrant our investigatiion for a publisher of our legal project which took off in 1997 by John Young posting our NSA lawsuit New Mexico 97 CV 266 on Cryptome.

June 1, 2009 John Young FOIAed the CIA for U.S INTELLIGENCE SHARING WITH IRAQ DURING THE IRAN-IRAQ WAR: 1980-1988.

www.prosefights.org/nm...

We are now focused on trying to get our stolen $22,036.00 back for filing a motion to void judgment and included criminal complaint affidavit against Brzezinski for inciting Saddam Hussein to attack Iran.

This is now known as the Nojeh/NSA lawsuit.

www.google.com/search?...=

Sarbazan and alineshat are posting on this subject.

There is probably a reason for the below email.

From: "Iran Defense Forum" [e-mail]
To: [e-mail]
Sent: Wednesday, June 10, 2009 10:01:34 PM GMT -08:00 Tijuana / Baja California
Subject: Happy Birthday from Iran Defense Forum

Hello billp37,

We at Iran Defense Forum would like to wish you a happy birthday today!

Jun 19 11:27 AM

[Leftfield:]

I'm always puzzled at the use of statistics whose makeup has changed. Productivity is one. How is it necessary to have two worker families who live less well than one worker families 40 years ago in the face of all this progress? And, productivity statistics are hugely affected by ridiculous inflation calculation methods used now and their change from the past. Constant inflation calculations wipe it out. With so many in government and Wall St. wasting resources, how can the shrinking private sector make up the difference?
As interesting commentary and information from a site like SA is a step forward, OR books is a natural extension of existing technology for good. I suppose Amazon won't be interested for now as their traditional sources would be apoplectic.

Jun 19 11:44 AM

[billp37:]

----- Forwarded Message -----
From: [e-mail]
To: "Colin Robinson" <Colin.Robinson@orb... "John Oakes" <John.Oakes@orbooks... [e-mail]
Cc: "Cargill Hall" <[e-mail]... "art morales"
Sent: Friday, June 19, 2009 8:49:35 AM GMT -08:00 Tijuana / Baja California
Subject: Legal project book proposal

Mr Robinson and Oakes

Would OR books [www.orbooks.com/] be intersted in publishing a book on our, so far, 17 year legal project?

We saw your company advertised at

seekingalpha.com/artic...

I am a published author with Harper/Row, Reston/Prentice-Hall, Academic Press/Elsevier spanning 40 years.

The book has no conclusion yet. One possible conclusion is WWIII.

But we would like the conclusion to be peaceful settlement of these unfortunate matters before they get worse.

regards
bill
505-292-7037
home.comcast.net/~bpayne37/entelec/ent...

Jun 19 11:53 AM

[joes:]

I agree that we are undergoing a moment of economic evolution, punctuated equilibrium, when things seem to change more quickly than typical. From my perspective IT and the Internet have set in motion the same fundamental changes that wide spread electrical power and automobiles did as the beginning of the 1900's.

These times come with two sides, the incredible opportunities being created for innovative companies on one hand, and the chance for new scams (and the reintroduction of some old ones as Bernie Madoff proved) so we need to beware and make sure that our regulatory measures are in line with the what the bad guys want to do, which is take your money.

As a long time worker in printing and a resident of Pittsburgh I've seen things go away that no one could imagine, we have a lot more of that to come. I like Obama's approach so far, he is showing some humbleness in his approach, not saying he knows what can't be known.

Jun 19 11:59 AM

[speeddaimon:]

I'm curious why the difference between eras in productivity isn't mentioned? Surely there is a difference between being productive in manufacturing and productivity in a services based economy? Working as a programmer, I know that I have run across many people that actually lower productivity. So by firing that person, our productivity would actually increase. I suspect this is the same across many services based industries.

So I guess my question is, that with all the layoffs that have taken place, is it possible that they started with the people who were actually cutting down on productivity? Then the next round were the middle management, those people who either contribute nothing to productivity or constrain it?

If you admit this is possible, this brings to mind another issue. If this is indeed the case, then once we start an economic recovery, do we really need to hire these people back? In a manufacturing setting, skills aren't really a prerequisite for being hired, it doesn't take a master's degree to screw on a panel, attach a thingamajig to a widget, or inspect something coming off of an assembly line. It just takes a warm body and an IQ in the normal range. In a services industry, a warm body is not enough.

I guess what I'm saying is that maybe the majority of people that have been laid off (not all of them, 51% constitutes a majority) are deadwood and unnecessary. What are the implications of a situation like that?

Jun 19 01:04 PM

[Lin:]

SPEEDDAIMON

80% of the lost jobs aren't coming back , they were useless from the getgo . You don't need a college education to do most jobs in US today. Technical training will suffice for most positions . For example , years ago , they promoted a BS or 4 year degree for nurses training , RN . This merely created a HUGE nursing shortage . the job can be done with a 2 year associate degree + on the job training . I SHOULD know firsthand , as I was in the industry for 28 years .With the new healthcare reform , nursing salaries are going down , has to for overall cost reduction . 4 year degree for GOD awlful , stressful work that's going to pay less ? I think not !

Jun 19 06:17 PM

[Gadi:]

Thanks for a great "mind openner".
Productivity will come from doing the right things instead of just hard work. To do the right things you need excellent information and good judjment. The information has to do with basic technology that its potensial has not revealed itself to most industries. Another information technology that Amazon an others are using is DataMining that can help Amazon suggest the right personal suggestion - it is not there in shops.

Jun 20 03:16 AM

[one eye:]

Does Productivity equate to on the job Experience coupled with Tech Innovation?

Barron's has an interesting Article regarding workers over 55 and the Social Security net.

I am applying that article to Productivity gains, wealth destruction and Unemployment.

The Internet Bubble collapsed the future retirement plans of many. Experienced workers stayed on the Job longer which I posit led to greater Productivity. It took a real long time for Employment numbers to pick up and they were Not centered in the sectors of previous employment growth.

The latest collapse will cause even more people to stay on the Job who have had their retirements squished and will bring retirees back into the workforce. They will be experienced and will not require "on the job" training nor will their salaries reflect what they once earned. Productivity will rise.

Unemployment will continue to rise, entry level jobs will also be hampered by the 2nd half of the Minimum Wage increase scheduled for Next Month.

Just an opinion.

Jun 20 05:46 PM