Why Productivity Boost Is Needed to End Recession

What's it going to take to get the economy out of its rut? Tax cuts, says the right. Public investments, says the left. Some of both, says the center. But after listening to a recent discussion about the recent and distant history of innovation and growth between White House economic adviser Lawrence Summers, former Fed chief Alan Greenspan, and Harold Evans, author of They Made America: From the Steam Engine to the Search Engine, I began to think that tax cuts and stimulus spending may be secondary. If history is any guide, in order to get the economy back to the level of growth that we'd all like to see, we're going to need a substantial boost in productivity. And prolonged periods of high growth have always been spurred by a game-changing megatrend that ultimately touched every segment of the economy: the steam engine, electricity, railroads, the availability of credit, the microchip, and most recently, the Internet, globalization, and cheap money. Finally, when you're dealing with an economy the size of the United States, you need a pretty powerful lever to create meaningful growth. Having a boom in a few sectors likely won't be enough.

So it looks like we're in trouble. Right now, it's difficult to sense the Next Big Thing. (Of course, that's usually how it goes. Back in 1992, when the economy seemed mired in the mud, President-elect Clinton summoned the nation's best economic minds to a summit in Little Rock, Ark. In the voluminous briefing papers prepared for the event, the words the Internet likely appeared rarely, if at all.)

In 1997, Paul Krugman argued that the productivity boost from computer technology was overhyped. In 2001, Timothy Noah analyzed two sparring opinions on tech-driven productivity. In 2002, Robert Shapiro explained why America has been so innovative and how to channel that innovation into productivity. In 2006, Jack Shafer debunked a popular estimate that NCAA's March Madness basketball tournament costs the country $3.8 billion in annual productivity.But what if, in the absence of one big thing, the next game-changer is a bunch of really small things? What if, instead of a huge external factor that boosts productivity—and hence profits and wealth—the next big driver is a focus on productivity itself? If governments, business, and consumers were to redouble their efforts to be more efficient, to do more with less—wouldn't that be enormously helpful? We could call it the Avis Economy: We All Try Harder.

Economists might dismiss such a hypothesis because, in their view, people are rational, profit-maximizing beasts and are thus always focusing on efficiencies. How much better can we do? But during the recent boom, when it was relatively easy to make perfectly acceptable profits without working too hard, we may have gotten sloppy. When you're swimming with a strong current at your back, you don't need to work as much on technique to record excellent times. Now, of course, we all have to develop Michael Phelps-esque efficiency just to make headway.

In my conversations with executives and reading of the business press, I get the sense that the corporate world has really decided to start trying harder. I touched on this in my column earlier this week about P.F. Chang's search for operational efficiencies. Last week, the health care industry stepped up and said it could shave $2 trillion off the nation's health bill during the next decade simply by controlling costs better—as if they haven't really been trying all these years. Companies are dusting off copies of Reengineering the Corporation, which was a bible for managers in the slow-growth early 1990s. American Express on Monday flagged its $800 million to cut staff, as well as spending on travel, marketing, and business development, as a "re-engineering plan."

While oil prices have subsided, the drive to produce efficiencies in the transmission, generation, and use of energy is still going strong. To hear the businesses that stand to profit from such investments tell it, there's a lot of low-hanging fruit that we can harvest if we only try. Tuesday morning, I spoke with George Nolen, CEO of Siemens America, the U.S. unit of the German industrial giant. The unit's revenues were up in the most recent quarter, and Nolen is seeing lots of efficiency-related activity: Siemens just completed work on a $150 million to $200 million high-voltage wire that reduces the loss of electricity during transmission from 10 percent to 3 percent. Its rail unit is keeping busy with several light-rail projects and is working on technology for New York City subways that would reduce the time between trains. Siemens is working with the military to manage energy use on bases: "One of our busiest units is the building technology group," he said. These are the folks who equip buildings with sensors, software, and wireless technology to control lighting and heating costs. "We have a program where we'll go in, audit your entire building, [and] put [in] a program and a financing program that says it guarantees [it] will pay for itself" in energy savings, says Nolen.

There are reasons to doubt the utility of an economywide focus on efficiency. Re-engineering corporations for greater efficiency creates jobs for some suppliers and vendors, such as Siemens, but also frequently results in the loss of jobs. More broadly, many of the efficiencies require subsidies, or nudges from the government. And virtually all of them require some significant changes in behavior. It wouldn't be too hard to distribute smart meters to every household in America, but what percentage of the population will actually monitor them and decide to turn down the air conditioning on a sweltering afternoon or run the dishwasher late at night in order to save a few dollars? Despite the obvious benefits, not everybody uses those energy-saving plastic pool covers I love so much. We could all increase the fuel-efficiency of our vehicles by 15 percent simply by eco-driving (or as I like to call it, Boca Driving. Many of the tactics advocated by eco-drivers have already been adopted by older drivers in Florida). But eco-driving can be extremely annoying.

I'd like to make this quest for efficiency a quasi-regular feature of this column. So, for all the economists, eco-freaks, and efficiency experts out there, this is your moment. How much can we gain simply by emulating Avis and trying harder? What are some of the most obvious (and more obscure) efforts that can be broadly applied across the economy? Is the whole idea of efficiency overrated? Let me know your thoughts and suggestions for future topics, which I'll be disseminating on my new Twitter feed: www.twitter.com/grossdm.