Lies, Damned Lies, and Productivity Data

The most over-analyzed economic statistic

The concept that productivity statistics try to get at is really important. We want to know what the trend is in our ability to produce goods and services. But I believe that the measurements that we rely on are so flawed that they are not worth analyzing. Whenever somebody pontificates on “the trend in productivity growth,” I stop listening.

For example, recently Brink Lindsey wrote,

we've been in a multi-decade period, a half century of depressed productivity growth, at least depressed relative to the glory years after World War II. And there are a whole host of broader social ills that maybe are associated with this productivity slowdown, both contributing to it, and being affected by it.

At that point, I stopped reading. I’ll get back to his dialogue at some point, but meanwhile I felt compelled to write this essay.

Once we have a measure of something, people will make an effort to interpret its most minute wiggles. People try to analyze the difference between 2.05 and 2.03, when measurement uncertainty means that the true number could be anywhere between -1 and +5.

The problem in the widely-used indicators of productivity starts with measuring what we are producing. GDP is a good measure of economic activity. It tells us how much we are trading with one another in the market.

But GDP is a flawed measure of the human value of what gets traded, and of how that value changes over time.

For example, suppose that the price of a smart phone produced in 2024 is $1000, and the price of a smart phone produced in 2019 was $800. What can we say about productivity in the smart phone industry?

If the smart phone in 2024 is identical to the smart phone in 2019, then we might say that there has been a significant decline in productivity, because the cost has gone up so much. But many people, given the choice, will buy the 2024 phone even if the 2019 phone is still available. That is because they value the newer phone’s screen, cameras, memory, battery life, and other features. We rely on government economists to assign values to those features, in order to calculate the “real” price of the 2024 phone.

Now, think about doing the calculation over a longer period. What is the value of a smart phone produced in 2024 compared with a smart phone produced in 1974, when the “productivity slowdown” supposedly began?

It’s a trick question. There were no smart phones in 1974. There was no general public access to the Internet in 1974. In America, telephony was still an AT&T monopoly in 1974. No one made video calls in 1974. You had to pay for long-distance phone calls by the minute in 1974.

The term “productivity slowdown” is used to claim that the rise in living standards was higher between 1924 and 1974 than it was between 1974 and 2024. This may be true in some sense, but to me it is an apples-and-oranges comparison.

Between 1924 and 1974, many more households acquired automobiles, washing machines, and air conditioners. In 1924, radio was novel and television was nonexistent. By 1974, everyone had a radio and a TV.

The improvements from 1974 to 2024 were not so much in quantities of appliances but in qualitative factors that are more difficult to measure. Better health, less pain and discomfort, more variety.

Today, many fewer people work in jobs that expose them to danger and long-term disability. People spend much more of their lives out of the work force—they spend more years in school and more years in retirement. The health of people over the age of 65 is far better than what it was fifty years ago.

Food is a completely different experience than what it was fifty years ago. In 1974, “prepared foods” meant Spaghetti-O’s and Swanson TV dinners. People ate out only rarely, and restaurants did not offer Thai food or Indian food or sushi.

Entertainment is a completely different experience than what it was fifty years ago. In 1974, television was still dominated by the three major networks. Only a fraction of people had videos of friends and family, and to watch those they had to set up a movie projector. Nobody watched home-made videos made by strangers.

In 1974, the phrase “root canal” was synonymous with torture. In 2024, it is a painless procedure.

In 1974, a cataract was a threat to your eyesight. In 2024, it is an opportunity to do away with the need for glasses.

In 1974, if your Camaro or your Pinto lasted 75,000 miles, you counted yourself lucky. In 2024, you expect your car to keep going for 150,000 miles or more.

One of the most interesting phenomena among people my age is the lack of interest that our adult children have in our possessions. They do not want our furniture, our appliances, our stuff. They turn down what we offer as not useful or easily replaced.

Nobody wants our accumulated books, record albums, and tools. And of course people no longer need typewriters, Princess Phones, stereos, or portable radios.

People talk about all the stuff not being made here any more because of imports. But there is a lot of stuff not being made here any more because the share of our consumer desires that are satisfied by stuff is much smaller than it used to be.

I am not trying to claim that the last fifty years have seen more improvement in the standard of living than the previous fifty years. But I contend that it is more of an open question than what the usual statistics would lead you to believe.

The numerical precision of productivity comparisons is deceptive. Just because government statistical offices produce numbers that include digits to the right of the decimal place does not mean that we know enough to confidently speak of a “productivity slowdown.”