It’s Inflation, Not Efficiency or Productivity

It’s Inflation, Not Efficiency or Productivity

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I laughed out loud Monday morning while reading the lead story in the Wall Street Journal, which tied the job-short economic recovery to the relentless efficiency of the modern corporation. Could a story be more easily debunked? Had Rupert Murdoch fired all his copy editors?

There was one single, meaningless data point behind a banner headline that read “U.S. Firms Emerge Stronger.” The 500 biggest U.S. firms in 2011 had $420,000 in revenue for every employee on their payrolls, up from $378,000 in 2007, the year before the Great Recession.

Companies had become “more productive, more profitable, flush with cash and less burdened by debt,” the story proclaimed. That’s why they were generating “fewer jobs” and were “leaner, meaner and hungrier,” according to the one economist quoted in the story.

That theme was picked up this morning in a column by David Brooks of the New York Times, who continued his long-running lament that America is dividing into two economies, one an export-oriented private sector that is ruthlessly efficient and another that is social service, government and purely domestic, hopelessly inefficient and slow to change. The growing divergence between Economy I and Economy II, he writes, helps to explain America’s increasingly polarized politics.

“Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I,” he writes. Democrats, meanwhile, “want to use Economy I to subsidize Economy II.”

It all sounds superficially plausible until one tests the basic hypothesis: does the alleged growth in revenue per employee signal a major increase in efficiency and productivity in the private sector? In fact, the numbers show just the opposite. Corporate America’s output per employee has barely budged since 2007 and has only recently exceeded where it was before the financial collapse, which roughly parallels growth in the overall economy.

Why do I say that? The numbers used by the Journal and picked up by Brooks are the actual revenue numbers for the S&P 500. They have not been corrected for inflation. To get an inflation-adjusted revenue-per-employee number, one must take the consumer price index produced by the Labor Department for 2007 (207.3) and 2011 (224.9), and correct the $378,000 for increases in prices over the last four years. Only then can one calculate the real increase in output, efficiency and productivity.

By doing the math, one comes up with an inflation-adjusted output-per-employee for 2007 of $410,000 in 2011 dollars. In other words, output per employee since 2007 has gone up a scant $10,000 in 2011 inflation-adjusted dollars.

That’s not zero. But it’s hardly cause for jubilation and clearly inadequate to base an entire theory about the drift of American society.

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.