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Productivity wins in the long run
Productivity and living standards
Living standards rise as people learn and accumulate knowledge, which is productivity growth. Those who are inventive and hard-working raise their productivity and their living standards faster than those who are complacent and lazy, though that isn't necessarily true over the short run.
Why debt swings
Debt, unlike productivity, swings widely, because it lets people consume more than they produce when they acquire it and forces them to consume less than they produce when they pay it back.
Three rules of thumb
Three rules of thumb follow. Debt that rises faster than income eventually crushes borrowers under their debt burdens. Income that rises faster than productivity eventually leaves an economy uncompetitive. Raising productivity is what matters most in the long run.
Why do small productivity gains matter?
Compounding makes small differences in growth large over time. At 2 percent a year, output per hour roughly quadruples in 70 years, and at 1 percent a year it only doubles. Paul Krugman made the point in his 1990 book The Age of Diminished Expectations, arguing that productivity is almost everything in the long run.
The same arithmetic applies to living standards.
Why does pay outrunning productivity hurt exports?
When wages rise faster than output per worker, unit labor costs go up, so goods cost more to make than a competitor's goods. Eurostat data show that between 2000 and 2008, unit labor costs rose faster in Greece, Spain, and Portugal than in Germany.
Those countries also ran large current account deficits through the period.
How has productivity growth changed over time?
Bureau of Labor Statistics data show US nonfarm productivity growth averaging about 2.8 percent a year from 1947 to 1973. It slowed to roughly 1.5 percent a year from 1973 to 1995.
It picked up again to above 2 percent a year in the late 1990s, as businesses adopted computers and networks.