Well we’re waiting here in Allentown, for the Pennsylvania we never found. For the promises our teachers gave, if we worked hard, if we behaved. So the graduations hang on the wall, but they never really helped us at all. No they never taught us what was real – Iron and coke, and chromium steel. And we’re waiting here in Allentown. This is the second verse of the song Allentown, written by Billy Joel, and released as a single in 1982. The song is about the decline of the American manufacturing industry in the latter part of the last century, and while Allentown was dependent on textile mills and general manufacturing, the song paid homage to the closing of the nearby Bethlehem Steel plant which eventually closed in 1995.
One of the main reasons why the US economy began to falter in the 1970s and 1980s was that productivity plummeted.
The chart below shows annual percent changes in total factor productivity for the United States and for four other countries – China, Germany, Italy and France – for the period between 1960 and 2019 (the last year for which data are available). Note that neither Italy or France are known as economic dynamos.
As the chart shows, while productivity growth in China has been extremely variable, it has also been rapid. In the case of the European countries, growth has been more constrained, however, Germany and France have seen productivity decline consistently during the period.
In the case of the US, total factor productivity growth has been in total less than in any of these countries save for Italy, with which it is virtually tied. In other words, the amount of output generated by the capital and labor used in production in the US has grown at a slower rate than even France.
Between 1960 and 2019, productivity growth in the US was only 0.64 percent annually. This compares with 1.1 percent annually in China and France and 1.2 percent in Germany. The differences are really noticeable when looking across decades. Productivity growth in Europe was quite high in the 1960s as economies were still recovering from the effects of World War 2. China, on the other had faced rapid declines in production as a result of Mao’s horrible policies known as The Great Leap Forward and the Cultural Revolution. In fact, these revolutionary socialist policies (some of which are now being proposed in the United States), reduced productivity by 0.18 percent in the 1960s, and 0.58 percent in the 1960s.
Since then, however, there have been some marked changes. Beginning in the 1980s and continuing till today, productivity growth in China exploded, while in both France and Italy it imploded. In fact, Italy saw productivity shrink in three of the last four decades, and by a remarkable -3.11 percent in the 2010s. Germany continued to maintain solid productivity growth, and the United States held at a steady though much lower rate than either Germany or China. Only in the 2010s did the digital revolution cause productivity growth in the US to truly expand, but even then, growth was lower than either of the other two major industrial countries.
Higher productivity means that businesses are producing more with less. When this occurs, it is possible for the fruits of economic activity to spread through the economy. Not only can business owners generate more profits to invest back into their firms, but workers will receive higher wages and consumers lower prices. This is the promise of capitalism, or in the case of China, state capitalism. When productivity falls, economies face inflation, wage stagnation, and lower standards of living. Wealth also tends to concentrate since managers will try to keep their income growing at the expense of labor and consumers.
As productivity has grown in countries like China and Germany, production has moved to those countries, and consumers in places like the United States and Italy, faced with lower wages, have tended to shop for products produced in those places simply because they are cheaper. This trend will continue and worsen as long as total factor productivity continues to lag in the US. This is why the graduations hang on the wall, but they never really helped us at all. It is why places like Bethlehem Steel were overtaken by Chinese and Korean rivals, and why factories in places like Allentown shut down and moved to China and Mexico. It is what will continue to happen as long as businesses in the United States are discouraged from investing in new plant and equipment, and as long as US workers continue to produce at lower rates than their costs will allow.