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2003 Annual Report—Federal Reserve Bank of Dallas

A Better Way
Productivity and Reorganization in the American Economy

The Best Hope for a Better Future

Productivity matters because it determines how well we live. Go around the globe. Go back in time. Poorer countries aren't nearly as productive as richer ones. Societies that have risen from poverty to affluence have done it by finding ways to get more from their labor and other resources.

Looking back, it's clear that productivity has made the United States a rich nation. Looking ahead, it should be just as clear that productivity remains America's best hope for improving living standards in the future. Other possible paths to a better life don't hold much promise. We can't consume a larger portion of our national output. Family obligations and lifestyle choices suggest we won't increase the proportion of the population at work. The unemployment rate rose during the recession and its aftermath, so it could come down—but only a percentage point or so.

Bar codes and scanners are making the service sector more productive. Supermarkets and other retailers are installing $25,000 self-service checkout stations, reaping an average cost savings of about 40 percent.

Productivity differs from these limited sources of progress. Productivity promises a better way because it's boundless. It draws on the vast potential of modern technology. It flows from the infinite promise of human ingenuity. It taps into the endless capacity to organize the economy more efficiently. Productivity will take us as far as we let it.

History tells us that economic progress can be a messy, often chaotic process. There are lags as well as costs for worker retraining and relocation. Turmoil in the job market causes hardships for displaced workers and their families. Some workers end up worse off. But the harsh realities of economic life can't be short-circuited.

Some of the troubling aspects of economic life—the job losses, the outsourcing—are good for productivity, the wellspring of progress. Understanding that, we can face economic change with less fear.

Human nature clings to the status quo: Most people are in favor of progress; it's change they don't like. We can't fall into that trap. We won't achieve greater productivity without shifting resources from existing to new uses. When labor moves from where it's no longer needed, we profit by whatever the recycled workers produce elsewhere.

Letting the economy reorganize to become more productive has worked wonders for the United States. Our future, no less, depends on doing things a better way.

—W. Michael Cox and Richard Alm

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