A Letter from the President

Having communications technology at our fingertips is raising productivity.

Federal Reserve Chairman Alan Greenspan was moderating a session at a conference a few years ago when the participants were slow returning from a coffee break. That prompted him to offer a little lesson in process improvement and productivity. “If you pour the coffee, add cream and then stir, it’s a three-step process,” he said. “If you put the cream in first and then pour, it’s a two-step process.”

Adam Smith, in Wealth of Nations, emphasizes the division and specialization of labor. By specializing, we gain skill and productivity. We do what we do best and trade for the rest. Productivity gains are limited only by the extent of the market. Bigger markets bring bigger gains.

Productivity is a hot topic these days. It’s also the subject of this year’s annual report essay.

Increasing productivity is what raises our standard of living. We have to produce more to consume more. Some productivity gains come from improved worker knowledge, skills and experience. Probably more come from workers’ having better technology and more capital to work with. And, yes, process improvements.

I’ve mentioned before my (thankfully) brief experience as a 10-year-old picking cotton on Billy Joe Hopper’s farm in North Georgia. My goal was to pick 100 pounds in a day. The adults alongside me could easily pick 300 pounds. With size and experience going for them, they were mainly responsible for their greater productivity. Today, one person driving a mechanical cotton picker can pick several acres a day.

Such quantum leaps in productivity have more to do with capital than with labor and have been common in agriculture. Indeed, the cotton gin was instrumental in ushering in the Industrial Revolution. Productivity growth on the farm now enables about 2 percent of U.S. workers to produce more food than 90 percent did in an earlier era. The same has been occurring in manufacturing for decades. Productivity gains enable fewer workers to manufacture more each year. Progress is measured by how few workers it takes to produce a given output, not by how many. We sometimes lose sight of this simple fact, especially during slack periods, such as we’ve had recently.

The Essay
Economists have traditionally discussed productivity in terms of inventions, new technology, labor–capital ratios and the like. Our essay, “A Better Way,” focuses on broader, macroeconomic factors such as trade and competition.

Think about your productivity level today as you work and spend the resulting income on the output of others. Now imagine how productive you would be if you were transported back to the United States of 100 years ago or 200 years ago or to an underdeveloped country of today. You might work harder and longer, but without our modern infrastructure of capital and technology you are unlikely to be as productive and well-off. You could work harder, but not smarter.

Think about how productive and well-off you would be if trade barriers isolated you from the workers and output of other countries. You might produce as much, physically, but your output would buy less and your standard of living would be lower. How would it affect your standard of living if the government prevented all job losses resulting from new technology, trade or competition?

Our productivity is as much about our economic environment, infrastructure and interaction with others as it is about us personally. That’s just one more reason to celebrate living in the USA.

The Economy
Recovery from the last recession began in November 2001, over two years ago. It was erratic initially and lost momentum, but it picked up in the second half of 2003 when GDP growth averaged over 6 percent. Unfortunately, new job creation did not match the recovery in output and income during the year. Job growth resumed in late 2003, but not vigorously. Productivity—a godsend in the long run—temporarily slowed job growth as businesses continued to find ways to produce more with fewer workers.

Until full employment is restored, we should do what we can to promote the dynamic growth needed to create new jobs, but avoid shortsighted actions that preserve the old jobs at the expense of new ones.

The Dallas Fed
The Dallas Fed had a good year in 2003 despite the challenges brought on by a declining volume of paper checks. Like other businesses, we’ve had to adapt by reducing costs and staff, but the transition from paper to electronic payments is part of the productivity revolution that raises living standards.

Sharing the platform with the Friedmans.

We held several major conferences in 2003, the most notable of which marked the 25th anniversary of Milton and Rose Friedman’s Free to Choose. The Friedmans participated in the conference, as did a long list of distinguished speakers who paid tribute to them and assessed their contributions to economic prosperity over the past quarter century. The Friedmans are national treasures—make that world treasures—and show no signs of slowing down in their 90s.

—Robert D. McTeer, Jr.
    President and CEO