PRODUCTIVITY GAINS
Everyone should read David Brooks's Friday NYT column, in which he visits FedEx's distribution hub and considers the real sources of economic growth:
But it's really all about the scanners, the little cross-hatched red beams of light, like at the supermarket, that register each package's bar code at least a dozen times during its overnight trip. The scanners mean that customers can check the progress of their packages over the Internet. Plant managers can monitor the nightly flow and prevent bottlenecks. FedEx can manage this gigantic business and still have accessible information on each individual item.
One employee told me that when he started work at the company 17 years ago, he marked individual packages with crayons. But FedEx has participated in the productivity surge that has been reshaping the American economy. If you were obsessed with the political campaign over the past year, you would have gotten the impression that there's no such thing as a service sector of the economy ï¿ it's all manufacturing ï¿ and that the U.S. is getting trounced by China and India in the competition for global business.
That's a distorted view of reality. Since 1995, the U.S. has enjoyed a productivity renaissance. The McKinsey Global Institute breaks the economy down into 60 sectors. U.S. workers are the most productive on earth in at least 50 of them. Productivity gains cause standard of living increases. Productivity gains lead to employment gains. If history is any judge, yesterday's excellent job numbers could mark the beginning of another surge in job creation.
As William W. Lewis, a former McKinsey partner, writes in "The Power of Productivity," about half the U.S. productivity gains have occurred in just two sectors, wholesale and retail trade. We've gotten really efficient at getting stuff from the hands of manufacturers to the hands of consumers. These innovations have had more important effects on how people really live than anything done in Washington.
Not that Washington is completely unimportant. Brooks alludes to the policy change that made these huge productivity gains possible: trucking deregulation during the Carter administration. But he's absolutely correct that the big economic changes that make for long-term economic growth have absolutely nothing to do with election-year policy debates--which is one reason I find politics less and less interesting and the rest of life more so.
MIT's Eric Brynjolfsson, who was studying productivity gains when most economists thought they were a myth ("the productivity paradox"), writes in Technology Review:
From the 1970s into the 1990s, U.S. labor productivity grew by barely 1.4 percent a year. Many economists thought it would be stuck at that level forever. But the growth rate jumped to more than 2.5 percent in 1995 and has averaged more than 4 percent since 2001.The difference is dramatic. It takes 50 years for living standards to double if productivity grows at 1.4 percent per year, but only 18 years to double at 4 percent growth.
The productivity boom is rooted in a revolution in the way American companies apply information technology. Technology-driven innovation is reshaping the economy, but managers who sit back and wait--assuming that technology alone will quickly or automatically introduce gains--are setting themselves up for failure.
The fruits of technological innovations introduced five years ago are being harvested today as more efficiently run operations. In the short term, this is one of several factors behind the so-called jobless recovery. But over the longer term, the digital revolution will promote sustained business growth and higher living standards for workers and society at large. To achieve this, however, managers must think out of the box--particularly the box that contains all that computer hardware. Capital spending on computer hardware accounts for only a fraction of the total investments powering today's efficiencies. The biggest investments go toward developing business processes that can reap technology's benefits. These efforts are less visible than hardware--but they're more important.
The unsung heroes of the IT revolution have not been the microchip and the Web browser, but rather the creative, diligent, and painstaking work done by those who have been rethinking supply chains, customer service, incentive systems, product lines, and 1,001 other processes and practices affected by computers. Investments of intangible capital constitute the real source of today's productivity growth. The challenge for managers is to use IT as a catalyst to initiate a wave of complementary innovations throughout their organizations.
That "creative, diligent, and painstaking work" almost never gets credit in public discussions of economics, but it makes all the differe