Fighting the Sag in Efficiency

A search for solutions as America loses ground

"Economists, the generals in our war against inflation, are fighting the wrong battle. We are told over and over again that the only cure for inflation is recession. I don't buy that. It's akin to cutting the head off when only a haircut is needed. You hold down the cost of living not by lengthening unemployment lines but by producing more goods and services more cheaply."

--Senator Lloyd Bentsen

For many noninflationary years, the U.S. produced more goods and services more cheaply by building new plants and lavishing billions on research and development. But those glory decades have ended, at least temporarily. Government policies now work to discourage saving, retard investment and divert into immediate consumption the money that industry needs to spend on new factories, new equipment and new skills. Partly because of this, over the past ten years, annual productivity growth has slowed to about half the average 3% increase of the 1960s. This has been a major cause of slow economic expansion, the debilitated dollar and double-digit inflation.

Last week the congressional Joint Economic Committee, of which Senator Bentsen is chairman, began special hearings into the productivity sag. From expert witnesses, the committee heard that despite the recent decline, the U.S. still has the world's highest level of productivity, but the lead is shrinking rapidly. In 1950 it took seven Japanese or three German workers to match the industrial output of one American; today two Japanese or 1.3 Germans can do as well. Last year the Japanese had a productivity increase of 8%; the U.S. gain was only .3%. In this year's first quarter, U.S. productivity actually fell at an annual rate of 4.6%.

Among the causes of the drop:

>Excessive Government regulations that have forced companies to spend cash not on new labor-saving and productive machines but on costly antipollution, safety and health equipment. Coal mining has been particularly hurt. Says Tom Duncan, head of the Kentucky Coal Association, a group of mine operators: "The man mining the coal is probably more productive than ever before, but now you've got one man carrying away possibly explosive coal dust, one or two men bolting roofs, one doing this thing and one doing that." In Kentucky, for example, productivity has dropped from 23.6 tons of coal mined per man-day in 1969 to 16.9 tons in 1977; in Illinois, the plunge has been from 26.4 tons to 14.9 tons.

>Inadequate investment by companies in new plants and modern machinery, partly because of low profits and relatively high business taxes that feed funds to consumers rather than investors. Additional funds are swallowed up by Government-mandated projects. U.S. Steel Corp., which in Youngstown, Ohio, is still using some equipment made 70 years ago, estimates that 30% of its capital investment over the next few years will be spent on pollution-control equipment.

>As a percentage of the national economy, research and development spending has dropped sharply in the past decade. Government funding was cut with the end of the Viet Nam War. Private universities have been caught in a financial squeeze. Many companies have judged the payoffs from R. and D. to be uncertain in an inflationary age. The number of U.S. patents issued in a year to Americans has fallen 25% since 1971; there has been a 14% rise in the number granted to foreigners.

>Changes in the work force have hurt some companies because many of the postwar baby boomers now seeking jobs are untrained. Under equal opportunity programs, employers have hired and promoted increasing numbers of inexperienced women and minorities.

Last week's congressional hearings concentrated on what the U.S. could learn from foreign countries. Joji Arai, manager of the U.S. office of the Japan Productivity Center, cited 15 reasons for his country's productivity surge, including lax antitrust enforcement, large spending on R. and D., and joint management-worker programs to increase quality and eliminate production-line bottlenecks. Looking at the European experience, Eugene Merchant, director of research planning for Cincinnati Milacron Inc., emphasized the importance of the so-called trilateral relationship among Government, universities and companies. This is an idea that Europe adopted from the U.S., but it has fallen on hard times in America, in part because of public dismay over Government-funded research by private institutions into weapons and chemicals during the Viet Nam War.

Senator Bentsen last month introduced six bills to boost productivity. They would, among other things, allow more rapid tax depreciation of R. and D. projects leading to innovations that are ultimately patented, and permit a 10% R. and D. tax credit for small firms. Stressing that the Carter Administration has been dilatory in proposing remedies, Bentsen admits that his bills "are not glamorous solutions. But they could increase productivity, and that would translate directly into less inflation and rising paychecks."

It has taken the U.S. some time to dig itself into a productivity hole, and it may be years before any new policies to lessen regulation and increase investment and research can be translated into productivity gains.

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