Industrial Insight

Some things cost less, some more…. | September 10, 2011

http://www.theatlantic.com/business/archive/2011/09/the-greater-recession-america-suffers-from-a-crisis-of-productivity/242704/2/

The Greater Recession: America Suffers from a Crisis of Productivity

By Derek Thompson Sep 7 2011, 1:30 PM ET

In fact, eating and clothing ourselves is getting easier all the time. Before the Great Depression, about 35% of family expenditures went to food and threads. Today, we spend only 10% of our income on food and 3% of our income on clothes. Again, this is an achievement of manufacturing and farming efficiency.

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The Greater Recession: America Suffers from a Crisis of Productivity

By Derek Thompson

Sep 7 2011, 1:30 PM ET 186

GOOD NEWS: JUST ABOUT EVERYTHING IS GETTING CHEAPER
(Or: Can You Be in Poverty With Two Televisions?
)

Poverty is overrated. That was the unmistakable conclusion of a report from the Heritage Foundation released this July.

Most of the 30 million Americans in families making under $21,000 “are not poor in any ordinary sense of the term,” the conservative think tank claimed, because they have widespread access to air conditioning, television, and a car. “They are well housed, have an adequate and reasonably steady supply of food, and have met their other basic needs, including medical care,” the authors wrote.

Behind the triumph of productivity, there is darker theme. Cheaper goods need cheaper workers.

Critics savaged the survey by pointing out that many families in poverty rent apartments where fridges and air conditioning units come automatically. But the study made an important point: The ubiquity and affordability of consumer technology is an astounding testimony to productivity in the electronics sector.

In fact, eating and clothing ourselves is getting easier all the time. Before the Great Depression, about 35% of family expenditures went to food and threads. Today, we spend only 10% of our income on food and 3% of our income on clothes. Again, this is an achievement of manufacturing and farming efficiency.

It doesn’t end there. Behind the most important technology stories of our time, there is a clear theme: The triumph of software. Consider the rise of Netflix over Blockbuster, music sharing over albums, Flickr over Kodak, Amazon over Borders, wireless Verizon over wired Verizon, webpages over printed pages. Everything getting cheaper feels the touch of innovation — especially online innovation, IT, and computer software.

But there’s a dark side behind the advance of productivity: Cheaper goods need cheaper workers.

BAD NEWS: ESSENTIALS ARE GETTING MORE EXPENSIVE
(Or: The Crisis in Meds, Beds, and Higher Ed)

You could say that everything is getting cheaper except for almost everything you need. We need places to live, energy to move, education to move up, and insurance to stay healthy. The productivity revolution isn’t doing much to make those things more affordable.

Even after decades of building up and building out, homes and apartments are still prohibitively expensive in our most productive cities. Adjusted for inflation, home energy costs doubled between 1967 and 2003, and continued to rise in the last ten years. The cost of medical insurance is growing faster than wages. Tuition and higher education fees are growing even faster.

Look at this graph. Study it. It is the answer to the question “What’s wrong with 1950s wages in 2011?” The core of our life — gasoline, electricity, homes, health care and higher education — is getting expensive faster than general inflation. Meanwhile, average wages are barely keeping up with the yellow line. When the middle class talks about feeling squeezed dry and sped-up, this is what they’re talking about.

Committing the graph to memory is easy. Coming up with a theory is the hard part. Let me try. The reason why toasters are cheap and health insurance is not is that the productivity gains that made toasters — not to mention computers, media*, durable goods, food, and clothes — more affordable are not spilling over into health care. The next chart from McKinsey tells the story: More than half of total productivity growth comes from computers and information technology. Practically zero comes from health care and education. In fact, one reason why heath and education are adding the most jobs today is that employers can’t meet new demand with technology or offshoring. They have to keep hiring people.

Health care isn’t cost-effective because …. well, there are so many reasons. But perhaps the most important reason is that there are not clear incentives to make it more cost-effective, said Ross DeVol, executive director of economic research at the Milken Institute. “Where you have international competition, there are major incentives for innovation and

efficiency,” he said. “For instance, there is enormous international competition in computers. On the other hand, health care and education are inherently local services that are labor intensive, and there’s little international pressure to raise efficiency to compete. Medical tourism [traveling to another country
to see a doctor], for example, is still small. There are very few pressures to raise efficiency.”

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