Our Productivity Crisis

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Derek Thompson has an interesting piece in the Atlantic about our “productivity crisis.” At the end of the piece, he highlights charts showing four areas where costs have risen much faster than inflation over the past few decades, which suggests that productivity growth has been low in these areas. I don’t really disagree, but I feel like all of them deserve a little bit of pushback. Here they are:

  • Housing. True, the average house price has gone up. But so has the average house size. On that basis, the cost of a new house has gone down from $90 per square foot to $73 per square foot since 1970. That’s not so bad.
  • Energy. Yes, it’s up, but look at Thompson’s chart for home energy costs. It doubles between 1973 and 1981, during the era of the OPEC oil embargoes. But since then it’s been flat despite the fact that oil prices have continued to go up. This is largely due to more efficient use of energy in response to the energy crisis of the 70s: we get more GDP per BTU of energy today than we did 30 years ago, and household appliances are far more energy efficient. Again, not bad.
  • Education. The price of higher education has doubled over the past three decades. But that’s driven not so much by higher actual costs, as by the fact that universities have simply learned that they can charge more. Obviously higher education is no productivity nirvana, but I think looking at raw costs is misleading.
  • Healthcare. Healthcare costs are skyrocketing, but this isn’t so much because, say, a chest X-ray costs more in real terms today than it did in 1960. It’s because a chest X-ray isn’t good enough anymore. We want MRIs. We want PET scans. We want tiny cameras sent into our blood vessels. Sure, healthcare costs a lot more than it used to, but it’s mainly because we demand a lot more treatments than we used to.

I don’t want to protest too much here. Higher education is no more productive now than it was in the Middle Ages, probably, and a huge number of all those extra medical treatments we demand are useless or even counterproductive. At the same time, I’m not sure it’s helpful to describe education and healthcare as industries that have low productivity growth. This suggests that they’re laggards who simply refuse to respond to consumer demand for more efficiency. But the truth, I think, is that we as consumers have demanded that universities retain much the same teaching model as they’ve always had, and we’ve been willing to back up that demand with ever more dollars. We don’t want our kids going to electronic classes and, apparently, we don’t want our state governments to subsidize public universities the way they used to either. On the healthcare front, there’s been tons of new technology, but we, as consumers, don’t want that technology used to provide the same old service at a lower price. We want it used to provide additional services. We’ve spoken loud and clear on that score.

Anyway, read the whole thing. It’s a worthwhile take on some of the problems we face, even if I think there are some caveats to keep in mind. After all, sluggish productivity is sluggish productivity no matter what the ultimate cause. Maybe it’s our own fault, but it’s still something to face up to.


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