Greenspan's magic portion: Productivity
By George Hager, USA TODAY
A landfill operator looks at the Al-jon Impact 91K Landfill Compactor and sees
a 45-ton, 460-horsepower, steel-wheeled tractor designed to drive back and
forth over garbage and trash all day and crush it enough to make maximum use
of landfill space.
Were economists to look at the 91K — unlikely, but imagine it happening —
they would see a gritty, real-world example of the sort of productivity magic
that Federal Reserve Chairman Alan Greenspan has been preaching is the best
reason to be optimistic about the U.S. economy these days.
The 91K has a computer on board and will soon have the capacity to be linked
to the Internet for troubleshooting.
"You don't think of something as mundane as a landfill compactor being
technologically advanced, but it is," says Al-jon CEO Kendig Kneen.
Like most businesses, Al-jon obsesses about how to squeeze more output from
every hour its 100 or so employees work. The Iowa company now builds a
landfill compactor in about 400 man-hours — half what it took to make one only
5 years ago.
"We're just at the tip of really making gains here," Kneen says.
Music to Greenspan's ears.
Though some economists flatly disagree with him, and others just aren't sure,
Greenspan has made the same boosterish declaration in four separate
appearances before congressional committees in the past 2 months: The nation
might be dangerously close to a recession, but that's just a temporary problem.
Today's crucial economic news is that American companies' productivity —
their ability to squeeze more output from every hour worked — is in the midst
of an extraordinary surge that shows no sign of stopping.
"The longer-term outlook," Greenspan says, "is undiminished in the sense that,
by any measure that I can see, we're only partway through one of (the) most
remarkable periods of technological advance, which is crucial to productivity
growth."
Greenspan's view is that the ongoing productivity boom is so strong that it will
help reignite the economy, control inflation, propel the federal budget surplus to
unprecedented heights and substantially reduce the long-run funding shortfall for
Social Security — long thought to be one of the nation's most vexing and
insoluble problems.
If the Fed chairman is right, the news really is good. But whether he's right is
an open question.
Productivity mystery
There's little doubt productivity has been booming for the past several years, but
it always goes through booms and busts. From shortly after World War II to the
mid-1970s, for example, productivity grew roughly 3% a year. Then, for
reasons economists still don't understand, it slowed to only about 1.5% a year
before picking up again around 1995 to about 3% a year or more now.
Economists figure the current boom has something to do with the proliferation
of computers, but they disagree sharply about how much. They similarly can't
say exactly why productivity boomed in the 1950s and 1960s and slumped in the
1970s and 1980s. Nor can they agree on exactly how to measure what they do
think they see.
"There is no absolute truth in the murky realm of productivity analysis," says
Stephen Roach, chief economist for Morgan Stanley Dean Witter. "Never has
been."
What economists do agree on, though, is that the seemingly insignificant
difference between 1.5% and 3% growth is huge. In a recent speech, Fed
Governor Edward Gramlich noted that at the lower growth rate, the U.S.
standard of living would double only every 46 years. At the higher rate, it would
double every 23 years, and at the rate it grew in 2000, it would double in 14
years, Gramlich said.
Lately, though, productivity growth has fallen off, which it typically does when
the economy slows down. Greenspan says the falloff has been small enough to
prove that the underlying boom is continuing: While economic growth slowed to
just 1.1% in the final 3 months of last year, productivity surged along at 2%.
"Productivity held up far higher than any of the models based on the previous
data would have indicated," Greenspan told Congress. "The numbers, as crude
as they are, are sufficiently persuasive that something different has happened."
Doubters remain
Not everyone agrees. "There's reason to be excited," says David Levy of the
Levy Institute Forecasting Center at Bard College in Annandale-on-Hudson,
N.Y. "But to say we have hard evidence that we've entered a new era of
productivity growth is a real stretch."
For some doubters, the recent economic slowdown hasn't gone on long enough
to prove Greenspan's case. "The productivity resilience of today's U.S.
economy has yet to be tested," Roach says. "It is reckless to hang the future of
the U.S. economy on productivity statistics of such dubious quality."
That said, though, Greenspan has a lot of support among economists and
business officials, who join him in insisting that the productivity boom will
continue — chiefly because it can and it has to. Examples:
In a tough business climate in which companies have little power to raise
prices and until recently have had a difficult time hiring workers, the only
way to stay profitable is to find cheaper and more efficient ways to do
what they do. If company managers don't remain profitable, someone
else will. "Senior managers will be fired if they don't deliver," says Diane
Swonk, chief economist for Bank One.
The other penalty for underperforming companies is market retribution.
"Major companies are receiving tremendous pressure from Wall Street,
and if you don't meet expectations, they kill you," says Sung Won Sohn,
chief economist for Wells Fargo.
Capital investment was a huge boost to productivity as companies bulked
up on computers and other high-tech tools, but it has slowed sharply.
Even so, businesses will have no choice but to continue investing in
newer technology, Lehman Bros. economist Joseph Abate says.
Computers have a useful life of only about 3 years before they're
outmoded, he notes. If a company doesn't buy new machines, "Their
competitor is going to go out and buy the latest piece of equipment and
eat their lunch," Abate says.
Despite the proliferation of technology, companies have just barely begun
to use the Internet and other tools that could make them more
productive. Greenspan cites surveys by the National Association of
Purchasing Management to make this point. In fact, a NAPM-Forrester
Research survey in January showed that fewer than 7% of companies
have achieved even 40% of the potential the Internet holds for online
procurement.
Another NAPM survey showed that only about half of companies have
made significant progress in using technology to make their supply
process more efficient. Norbert Ore, who heads NAPM's monthly
manufacturing survey, says his guess is the real number is closer to 15%.
"We're still at the foot of the mountain," he says.
Internet infrastructure maker Cisco Systems says it has saved more than
$1 billion a year and streamlined its operations by moving all its internal
processes and most of its customer service to the Web. But Peter Solvik,
Cisco's chief information officer, says there's much more for Cisco and
other companies to do — for instance, find a way for engineers to work
on a project simultaneously over the Web. "The Internet hasn't
transformed the way you do engineering yet," Solvik says. "We think
there are clearly killer applications here."
You don't have to run a high-tech company to exploit technology. To
avoid counter-productively chewing up and flinging around the trash it's
supposed to flatten, Al-jon's giant landfill compactor, the 91K, has an
internal computer that senses when it's cornering and instructs its
enormous outer and inner wheels to roll at slightly different speeds. And
should the 91K develop a glitch, its owners will soon be able to use a
laptop computer and special software to connect it to the Internet and let
Al-jon technicians back at the company's Ottumwa, Iowa, plant diagnose
what's wrong.
Al-jon also is finding other uses for the Internet — from training
employees to moving more of its business dealings onto the Web.
One of the changes that most impresses Greenspan is the shift in
business culture that allows cooperation between purchasers and
suppliers that would have been unthinkable when he served on corporate
boards a quarter century ago. David Nelson, vice president for
worldwide supply management for John Deere, oversees 95 engineers
who work with Deere suppliers to make their operations more efficient
— so Deere gets its supplies cheaper. "The more productive your
supplier, the more productive you are," Nelson says.
The combination of pressure, potential and inventiveness seems to keep
generating innovations that allow companies to become more efficient.
Between 1994 and last year, steelmaker LTV boosted its output from
514 tons of steel per employee to 629 tons, says Mark Tomasch, senior
director of corporate communications. "Just when you think it can't get
any better, somebody comes up with a little something and it gets better,"
he says. |
