September 21, 2003|By Alfred Tella
THIS IS the story of a well-fed dog that bit its master. The dog's name is Productivity. Its master is a Republican politician.
National economic growth is on the rebound. After limping along during the current recovery, real gross domestic product (GDP) perked up to a 3.1 percent annual rate in the second quarter of this year. Economists are now raising their forecasts, and it is a realistic possibility that economic growth will notch up to a 4 to 5 percent average annual rate in the quarters leading up to next year's presidential election.
This would appear to be unequivocally good news for the president and Republican politicians generally. But is it?
The present economic recovery has been driven by productivity. Productivity is output per hour of work, a measure of the economy's efficiency. By the inexorable arithmetic of economic growth, when productivity rises faster than gross domestic product, employment or hours worked must decline. That's what been happening.
Growth in nonfarm business productivity during the recovery has been unusually strong, rising by an average annual rate well above 4 percent. In the most recent quarter, it jumped to a staggering 6.8 percent annual rate. By comparison, the economy during the recovery has been growing at a slower 2.7 percent average annual rate.
Consequently, nonfarm payroll employment, after falling by more than 1.6 million during the 2001 recession, has continued to decline, falling by an additional 1.1 million during the recovery.
The promise of President Bush's latest tax cut was that it would create jobs. The tax cut does appear to have lifted economic growth and given a boost to wages, profits and the stock market. But thus far there has been no sign of a turnaround in employment.
Jobs and the economy are at the top of the list of issues that concern voters. The big political question for next year's election is: Will the downward trend in employment continue or be reversed?
If employed workers continue to see those around them getting laid off, their job security will become more threatened. When workers worry about their jobs, they may tighten their pocketbooks. Thus, consumer spending could suffer, which in turn could retard economic growth and threaten another recession.
What happens to employment is mostly riding on productivity.
Productivity is a fickle creature in that it jumps around in the short run, often defying economic prediction. When it departs from past performance, as it has by its show of strength in the current recovery, it's hard to know if it will remain strong or slow up in the quarters ahead.
To some extent, the strength in productivity reflects the introduction of labor-saving technology and the exporting of jobs. But if businesses begin to run out of the opportunities to reduce labor costs, productivity growth could slow.
For employment to reverse direction, productivity growth would have to taper off to a 3 percent or lower annual rate, with GDP growing at 4 percent or better. This could happen. In that case, Republicans would breathe a sigh of relief and be able to claim that the latest Bush tax cut worked.
But if productivity remains strong, employment will fail to rise. In that case, Democrats will have a powerful election issue.
Consider the irony. Republicans are the first to support policies to aid business investment and encourage productivity growth. And indeed the productivity pet has been well fed. But it's biting the hand that feeds it.
Alfred Tella is a former Georgetown University research professor of economics and a novelist. He lives in McLean, Va.
