Productivity: an early warning sign?

Make Me Smart August 30, 2022 transcript

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Kimberly Adams: Hello everyone, I am Kimberly Adams and welcome to Make Me Smart, where none of us is as smart as all of us.

Kai Ryssdal: I’m Kai Ryssdal. It’s Tuesday, one show one topic, today we’re talking productivity, we’re talking productivity in the pandemic, we’re talking productivity and why it matters. We’re talking productivity and economic growth, all aspects of productivity. We’ve seen some ups and downs, shall we say, in that particular economic indicator of late.

Kimberly Adams: Right, right now we’re seeing what they call historic declines, as we haven’t seen them since like the late 1940s. And it’s not necessarily a new thing. We’ve had this productivity slowing down for years. So what we’re going to get into today is why is this happening? Should we be worried? And what does it mean for our economy? Because productivity is kind of like the thing that fuels economic growth. And who knows, maybe we’ll even talk about quiet quitting a bit.

Kai Ryssdal: Oh, God, do we have to? I’m so sick of that phrase. Here to make us smart today is Kweilin Ellingrud, she’s the director of the McKinsey Global Institute where she leads research on global productivity. Kweilin, welcome to the podcast.

Kweilin Ellingrud: Thank you.

Kai Ryssdal: Okay, so let’s do some definitions first, right? Productivity is widgets produced per hour worked if you want to get mathematical about it. What is it really, though? And what does it show us?

Kweilin Ellingrud: Yes, productivity is basically output per unit of input, and generally at the country level, it means GDP per worker. So you described widgets per hour at the individual level, when we take that up for countries, GDP per worker is what we typically think about in terms of labor productivity. And it matters because it basically leads to higher incomes, it drives a richer society, it basically drives higher standards of living for the United States and around the world.

Kimberly Adams: Okay, so then productivity here in the United States, by the way, PRAH-ductivity or PROH-ductivity?

Kai Ryssdal: No, that’s a serious question. She’s totally serious.

Kweilin Ellingrud: I say PRAH-ductivity, but I think either one works.

Kimberly Adams: All right. So then what’s been happening with productivity in the last year? And how does it compare to sort of historical trends?

Kweilin Ellingrud: Yeah, Kimberly, let’s put this in really broad historic perspectives. The last couple quarters, to your point, have been very, very low productivity. But earlier on in the pandemic, we actually saw productivity increase. And part of this was because early on in the pandemic, there were a lot of labor losses. So people were losing their jobs, demand was still relatively high, it dipped a bit. But with some of the stimulus checks and others, there was still demand in the economy. So the numerator of sort of GDP and demand was high. The denominator was lower, because there were fewer workers. And so productivity was high early on in the pandemic, it has now since dipped, and there’s a lot going on these days.

Kimberly Adams: But can I pause you for a second, for those of us who haven’t taken math in a really long time, the numerator is the number on the top of the line, the denominator is the number on the bottom of the line that you divide to get the thing. Anyway, go ahead.

Kweilin Ellingrud: So early on in the pandemic, what we saw was high productivity, because demand or GDP was still pretty high. And we were achieving that with a fewer number of workers. A number of people had lost their jobs, and so fewer workers in the overall economy, but the stimulus checks were still keeping demand pretty high. What has changed though, since early on in the pandemic to these first couple quarters of 2022, is now we’ve got lower productivity. We’ve got waning demand, we’ve got high inflation, which is quite challenging for demand. We’ve got fragmented supply chains, both globally and even regionally, we have higher geopolitical tensions. So a lot is affecting overall productivity. And if we zoom out even further and go back historically, what we see even, you know, post 1990s, we saw a lot of productivity increase with personal computers, with software, with database systems, as that completely transformed global supply chains. That was a huge productivity boom, historically. Then, after that big wave of productivity, we actually saw productivity drop by about one percentage point across most countries around the world. And that was sort of phase one. Then that headed into 2008, particularly the financial crisis in 2008, caused another about one percentage point drag in productivity across countries. Because we had job losses in financial services, we also had lower loan rates, we had capital intensity and growth overall slowing because of loan volumes in that wave. And then we headed into kind of horizon three, where we saw a lot of digitization, and we’re seeing that continue now. We’re seeing a lot of automation. In fact, automation accelerated by COVID. But we’re not yet seeing all the benefits of that. So we’re certainly seeing the investments and the costs of paying for the digitization and the automation. But if you talk to company leaders, many of them will say, I’m starting to see small benefits, but it’s, you know, fingers and toes, it’s bits and pieces. I don’t yet have entire jobs that have been eliminated because of automation, I have maybe a third of the work overall, but it’s bits and pieces of everybody’s work. And to fully capture those benefits, and then see the benefits through productivity, I’ve actually got to redesign the work and the jobs to kind of see that all the way through. So we’re part of the way down that road, but it’s yet to fully play out.

Kai Ryssdal: So as the trained observer in this conversation, are you concerned?

Kweilin Ellingrud: I am a bit concerned, partly because of two quarters of low productivity, and partly because we have all of these broader pressures of geopolitical tensions, these fragmented supply chains, which really are a new normal, right, after decades of globalization and integration, and just in time management. This is a really different way of managing. We’re seeing energy prices through the roof, and now they’ve come down a little bit. But inflation affecting both energy, food. A lot of that will deter investment, and interest rates overall will deter investment, and that may hit across multiple industries and further slow down productivity. So I am concerned because productivity matters for all of us. This is something that we need to continue to watch. Hopefully, this will be just a momentary quick turnaround. And we’ll see productivity rise in the future. But if it doesn’t, I do think there’s a cause for concern.

Kimberly Adams: Just to make sure that I understand this fully, can you expand a little bit more about that link between inflation and productivity?

Kweilin Ellingrud: Absolutely. So because productivity is GDP, or sort of growth overall, when inflation and interest rates are high, it deters investments in companies, it deters taking out a loan to invest in a capital plant, or to invest in a big project that may pay off down the road, because the interest rates are too high to get that return on investment. And so then companies avoid making those investments, just like individuals might avoid taking out a home interest, home equity loan to invest in their home. And then that overall, and over time decreases GDP. And so that’s the cause for concern we have if interest rates continue to be high for too long, that will damp in our overall economy across industries, some industries much more than others, but across the board that will dampen growth rates.

Kai Ryssdal: We should be clear here that, and you alluded to this, I mean, this is a long term, I don’t want to say problem, but it’s a long-term issue, right? And what productivity is doing month to month, even really year to year is not the thing, what we want to keep our eye on is where it has been, and then where it is going, right?

Kweilin Ellingrud: You’re exactly right. Right. This is a long-term trend, we should be looking at it in, you know, chunks of years, three years, five years, right. And we see sort of decades and some of those trends over time, I would look at these first couple quarters as just an early warning sign, right. So something to be looked at and watched. And if it doesn’t turn around, action is probably needed.

Kai Ryssdal: Sorry, let me, let me just follow up real quick. Is there a role for government here to make it better? I mean, action by whom? Or who, I forget.

Kweilin Ellingrud: I think action by a number of groups, that certainly interest rates and the Fed have a huge role to play there as they’re actively communicating. I do think some of the federal stimulus and federal investments can play a role in both dampening inflation, but also spurring growth in certain sectors and spurring job growth as well. And then companies in making those investments, right, not being deterred by higher interest rates, but making the positive return on investments that are going to make sense down the road. And then most importantly, capturing the productivity lift from automation, from, you know, restructuring jobs so that they can fully capture higher levels of productivity across different roles, across different industries.

Kimberly Adams: So as the resident elder millennial here, talk about the quiet quitting air quote phenomenon, and is this really something that factors into productivity where we are right now?

Kweilin Ellingrud: I think it certainly could. So quiet quitting, the definition being that I’m just going to do the bare minimum in my job, I’m not going to go above and beyond anymore. And if workers start to work less and do less, that will show up in their productivity, their individual productivity, that then adds up to company productivity, that then adds up to overall economy or country wide productivity. So if workers are quiet quitting and doing less on their job, that should show up over time in productivity numbers. Now, the one exception is, if they’re being thoughtful about what they’re actually quiet quitting on, if they’re stopping the work that is unnecessary and unhelpful, not really adding any value, then that probably wouldn’t affect productivity, because frankly, they shouldn’t have probably been doing that work to begin with. But the more they stopped work that is value-add, that is important to do, we will see that flow through over time into productivity numbers.

Kimberly Adams: But what about the people who like, say, somebody quits, and some other folks just absorb their jobs that in theory increases your productivity, but those jobs went away? Like how does? And if you say, You know what, no, my colleagues quit, and I’m not going to do their job, that job’s just going to be undone. Like, what does that do?

Kweilin Ellingrud: Absolutely, Kimberly, that’s the inverse or the opposite of the quiet quitting, right? That does increase productivity, because now I have either the same output or the same kind of growth generated for fewer employees. And so your productivity for a group of five if somebody quits will go up by 20%. And that is, I think, part of the phenomenon that we saw early on in the pandemic, right, relatively stable levels of GDP for fewer employees as the input. And so if we see more and more of that, we should see productivity rise. Now, that is not sustainable. And so to our conversation earlier of productivity as a long term game, right, we want to look at long term trends. And if we’re getting a short term burst that is unsustainable, that is not the kind of productivity that’s going to help us in the medium and long term.

Kimberly Adams: So sorry, I’m just gonna hammer on this point. So is this drop in productivity, simply an acknowledgement of the unsustainable growth in productivity that we had before? Or is it really a meaningful change in the economy?

Kweilin Ellingrud: It very well could be a reflection of frankly, exhaustion, from two and a half years of quarantine, of kind of working in remote ways, working longer hours potentially, and also some of the mental health challenges and intensity that many have experienced. So it could be a temporary reflection of that. Or it could be an early warning sign of a longer-term trend. So we will have to wait and see. But just knowing that productivity is so critical for all of us and for standards of living in this country and around the world, it is worth keeping a close eye on.

Kimberly Adams: Kweilin Ellingrud is director of the McKinsey Global Institute, where she heads up research on global PRAH-ductivity. I I’m feeling very validated, I want to look it up online and actually see what the dictionary said. But if Kweilin says PRAH-ductivity, I’m team PRAH-ductivity. Thank you.

Kai Ryssdal: Kweilin, thanks a lot.

Kimberly Adams: Thank you. All right. Oh, man. Yeah, it’s just the angst over the quiet quitting thing the last couple of weeks is really made me think like, I just don’t think it’s a real thing. I think that we were – what Kweilin just said, that we were at these unsustainable levels of work. And now people are just like, you know what, it’s not worth it. Not worth my mental health. I’m not getting paid enough for this. And so every time I see this, like, freak out over the drop in productivity, I’m just like, is it really a drop in productivity? Or is it a reset to reasonableness?

Kai Ryssdal: Yeah, that’s exactly right. That’s exactly right.

Kimberly Adams: Yeah. All right. Well, tell us what you think. Are you obsessed with being productive? Oh, I guess in that case, it’s PROH- anyway. Do you feel like you’ve been more – become more or less productive? Let us know. Our number is 508-827-6278. Also known as 508-U-B-SMART. You could also send us a voice memo at makemesmart@marketplace.org And we will be right back. And now it is time for the news fix. Kai, after you.

Kai Ryssdal: Okay, so this was actually yesterday, but I didn’t do it yesterday. For some reason I forget. And I want to make sure people understand what’s happening here. So last week, Friday, Jay Powell gives a big speech. Actually, it was very small speech, at less than eight minutes and 51 seconds, the shortest speech by a Federal Reserve Chair at the big Jackson Hole retreat in at least 20 years. And basically what Powell said is, we are going to raise rates until we have beaten back inflation and then we might raise a little bit more if we have to to make sure that the boogeyman is really dead. And stocks promptly did what you would expect stocks to do when the Fed Chair gives them a talking to, which is they rolled over and fell 3% pretty much across the board. And then there was a podcast that came out yesterday, by Joe Weisenthal and Tracy Alloway at Bloomberg. They do a podcast called Odd Lots and they had Neel Kashkari. Neel Kashkari is the President for the Federal Reserve Bank of Minneapolis. And Kashkari, when talking about the Fed speech, and more importantly, the market reaction said he was happy that the market finally seems to be taking on board what the Federal Reserve has been saying that they understand that interest rates are going to keep going up. And now we finally get it. Here’s why this matters. What the Federal Reserve is trying to do is to adjust what are called financial conditions, right? They want to make people feel like money is tighter. And that manifests in many, many ways, right? Literally interest rates, the tenure, corporate bond spreads, stock market, all kinds of things. The biggest indicator of it, though, is the stock market. When stocks fall and they fall hard, financial conditions are perceived to be tightening. And that once again, is what the Federal Reserve wants to do. They want to make money more expensive. They want to make people stop spending. So the inflation stops going up and in fact, really contracts back to where it wants, where they want it to be, around its 2% target. And it’s really important that people understand that what’s happening now in the markets out in – you know where they’re at today, down a little bit. But what’s happening in the markets and financial conditions, is what the Federal Reserve wants to happen. They want things to tighten up. It’s just important people understand that.

Kimberly Adams: So is there this sense that the markets just didn’t believe them?

Kai Ryssdal: Yes, yes. Literally, literally. To paraphrase Kate Davidson, who’s at politico, and is on our Friday show every now and then on Marketplace, it’s like when you take your kids to the playground, and you’ve had enough finally after an hour, and you say, okay, kids, 15 minutes, okay, kids, five minutes, okay, kids, one minute, we’re leaving. And then you say, okay, kids time to go, and they somehow freak out because they didn’t understand that it was time to go, right? And now hopefully, the markets understand that it’s actually time to go.

Kimberly Adams: What is the consumer side of that look like? So, there’s the markets coming to terms with it. But what does it mean for like you and I to come to terms with it?

Kai Ryssdal: Well, if you understand the financial conditions are tightening, right, you may not take out whatever loan you’re going to do, you may pay down your credit card balances, you might be more cautious about your spending, which is all of which Powell wants to have happen. We talked about this on a Wednesday, a couple of Wednesdays. What can I as an individual do? Put your money under your mattress and stop spending. Right. I mean, that’s fundamentally it. And now I think Powell understands that – I’m sorry, the markets understand that Powell is serious, you know?

Kimberly Adams: Yeah. I mean, I was chatting with one of my friends about, you know, remembering, and I think I mentioned this on the show a while back, like being teenagers and starting savings accounts and investing in CDs, for example, certificates of deposit. And like, laddering those CDs where every time one – I know, right? We were, we were probably way too financial savvy. No, we had parents who were paranoid about our long term well being. Anyway, but this idea that you could like put a little bit of money in the bank, and if you just left it alone, it wouldn’t compound and compound and compound, which nobody has been able to do for like 20 years. Right? And so like there’s a whole level of financial literacy of operating in a higher interest rate environment that people just do not have. Literally a generation it’s been 1975-ish, you know? For sure. Yeah. Okay, I’m not – no, not 1975. Well, that’s kind of… anyway, sorry. As the younger – what are you, the older millennial in the room?  Older millennial is what they call me. But no, I feel like that that may be something that we need to potentially talk about in a future show. It’s like what financial literacy tools do folks need to operate in a higher interest rate environment? Because a lot of people just don’t know.

Kai Ryssdal: For sure. Anyway, what’s yours? Go ahead.

Kimberly Adams: Mine is on a new study out from – let me just get it pulled up again. It was a study presented at the annual meeting of the Endocrine Society in Atlanta, Georgia. That – and I’m reading here from the Science Daily piece, thank you Marketplace newsletter. For the two experimental male contraceptive pills appear to successfully reduce testosterone without causing unacceptable side effects. Science words for they’ve got a male birth control pill that probably looks like it’s gonna work.

Kai Ryssdal: I wonder what unacceptable side effects are when you’re thinking about a male birth control pill versus all the damn side effects for female birth control pills.

Kimberly Adams: I mean, like, look, there’s clearly a double standard here, but I’m guessing like people, men feeling like they lose their juju or something like that, or, you know, they decrease the amount of body hair that they’re growing, you know. No, seriously, you’re talking about reducing testosterone, you’re talking about reduction of body hair, potentially, like, you know, man boobs getting a little bit bigger, or whatever. And these have been real issues that have come up in the past when they work on these things. And now they’ve got some pills that seem to get around these things, but also meaningfully reduce, you know, your sperm count and your ability to make somebody who gives birth pregnant. And this is increasingly important, because in many, many parts of the country now, abortion is less accessible, and the risks of having unprotected sex are just significantly higher. I mean, not to mention, you know, all the STDs and STIs, which, you know, a birth control pill’s not going to help you with. But when you’re talking about pregnancy, you know, the risk is just higher for an unplanned, if you have an unplanned pregnancy. And, you know, if you’re worried about those child support payments, it may be worth it to you to take a pill every day. And yes, women have been taking birth control pills and dealing with the side effects for ages, from the weight gain and the bloating and the mood swings and all that stuff. So cry me a river if you’re worried about the male birth control pill, but I do think it takes on additional sort of political connotations and social connotations in this specific environment.

Kai Ryssdal: Absolutely yes. Absolutely yes. Alright.

Kimberly Adams: I’ll be curious how that goes if it gets to market soon.

Kai Ryssdal: And hopefully it does, right, because for all the reasons you just laid out. Anyway. News! Mailbag!

Kimberly Adams: Okay, first up, we have a voice memo that came in from a CPA after our recent discussion about the IRS and tax filing.

Matt: Hi, Kai and Kimberly, this is Matt from Chicago. I’ve heard the idea of the IRS doing your taxes for you floated before. But there’s one big drawback I see that many people may not think about. Kai was right to point out that the IRS already knows a lot about your taxes before you file. But the problem is the IRS mostly knows about your income. They don’t know anything about a lot of your education expenses, medical expenses, and many other deductions that could reduce your tax bill. My misgiving is that if people got a mostly completed return in the mail, and were prompted to review, edit and sign it, many would miss their deductions and credits and ended up just signing what they got and paying more taxes than they needed to. That’s just my thought anyway. Thanks for always making us smart.

Kai Ryssdal: Totally fair. Totally, totally fair. You know, and that’s a tax code question more than a, you know, how you file but uh, totally make sense. I totally get it.

Kimberly Adams: I mean, yeah, but like, on balance, you know, the potential harm versus the potential good. The people who would have that situation are often – people who are doing deductions, in general, tend to be higher income, probably have a little bit better access to financial tools. And so, you know, I just think, on mass, that the general population would likely be better off.

Kai Ryssdal: Yeah, my gut tells me that’s right.

Kimberly Adams: But I mean, I’d love to see a study sort of breaking that down, sort of like, what would be the actual consequences of of that in the US?

Kai Ryssdal: Yeah, totally true. All right. Before we get to this next one, I want to, I want to follow up on what I said yesterday about the Space Shuttle engine, not the spacial engines. Well, they were the spatial engines, but the rockets that are going on the Artemis thing. I got a DM yesterday from Francois Florence, who writes about a couple of things, one of which was the Aerojet Rocketdyne shuttle engines used on the SLS, which is the big rocket. Yes, they are all reused, he said, but this is their last use as the SLS boosters are not recoverable and will end up in the ocean. So this is the swan song, if you will, for those rocket engines, right. I just thought people might be interested in that.

Kimberly Adams: I wonder how much space junk is like in the bottom of the ocean at this point.

Kai Ryssdal: Oh so much. So much.

Kimberly Adams: And like how we just sort of ignore the environmental consequences of that for the larger good I guess, of going to space?

Kai Ryssdal: All right, here we go. Next one.

Listener: Hi, Kai and Kimberly, I want to maybe add a little bit of hope on that 2050 date on phasing out gas powered cars. Okay. Just like with electric cars, gas powered cars are eventually going to face problems with charging and the infrastructure that supports them. So I wouldn’t be surprised if at say, 60% of the cars on the road being electric, you actually start to face an issue where it becomes legitimately hard to find a gas station to fill up your car. That’s it. Great listening to your show. Thank you for keeping us happy.

Kimberly Adams: So range anxiety for gas cars,

Kai Ryssdal: Do you see that piece of the Times – maybe it was the Times, I forget where it was, maybe the Atlantic, about how people have all this range anxiety about 300 miles and you know, can they get 320 or whatever. When was last time you drove 300 miles, right? Something like 90% of car trips are like 25 miles or less or something.

Kimberly Adams: Yeah, not a real concern. All right. Before we go, we’re gonna leave you with this week’s answer to the make me smart question, which is what is something you thought you knew, but later found out you were wrong about?

Dee: Hi, this is Dee calling from Racine, Wisconsin. My daughter Chloe called in from London with her make me smart a couple of weeks ago, and she challenged me to call in.

Kimberly Adams: Family affair.

Dee: I thought that when I first held my newborn children in my arms, that that must surely be the most difficult part of parenting. The parent has to do everything for that child. But then the kids get a little older and they start toddling about, and I found out that keeping a constant eye on them was far more difficult because they don’t understand the dangers of the world. In a few years, they become vocal and I found it was even harder to try to answer all their questions about how the world works and what’s happening. And when they became preteens, they started asking ethical and moral questions, the kinds that don’t have a right or wrong answer, and that was far more challenging. When they became teenagers, they stopped asking questions at all and not knowing what was going on was more difficult than anything else so far. And finally, they became adults, and they moved out on their own. And at that point, I realized that the very hardest part of parenting is giving them the freedom to take everything that we’ve given them, and to leave and pursue their own dreams, which is why my daughter lives in London, and I’m in Racine. So now I know that those sweet infants that I held in my arms represented the very easiest part of parenting. I love my kids, and they make me proud every single day. They’ve definitely made me smarter. Thanks to the show. I really enjoy it. And you make me almost as smart as my kids have.

Kai Ryssdal: Oh, I love it.

Kimberly Adams: Oh, that’s making me all misty eyed. That’s so sweet. That’s a great one. Thank you for sending that in. If you want to send me a make me smart that doesn’t make me cry, or any version of your answer to the make me smart question, you can send it to us via voice memo to our email at makemesmart@marketplace.org, or leave us a message at 508-827-6278 also known as 508-U-B-SMART. Or YOU-B-MISTY-EYED. It’s the dry air in California, I tell you.

Kai Ryssdal: Make Me Smart is directed and produced, or produced and directed, by Marissa Cabrera. Our intern is Olivia Zhao. Ellen Rolfes writes our newsletters. Today’s program is engineered by Juan Carlos Torrado. Mingxin Qiguan is going to mix it down later. Ben Tolliday and Daniel Ramirez composed our theme music.

Kimberly Adams: The senior producer is Bridget Bodnar. Donna Tam is the Director of On Demand. Franchesca Levy is the Executive Director of Digital. And Marketplace’s Vice President and General Manager is Neil Scarborough.

Kai Ryssdal: Man, we got more credits on Tuesdays than we know what to do with!

Kimberly Adams: I know, so many people.

Kai Ryssdal: But they are people who do all the work by the way, Kimberly and I are just kind of dumb.

Kimberly Adams: I know, we just ramble.