Technology May Not Drive Nation’s Productivity, but It Can Hail a Taxi

DALLAS — Is America’s economic productivity finally rebounding after years of relative stagnation? For one perspective, just call a Yellow Cab the next time you’re here.

Chances are that the supervisor can tell instantly which of the company’s 450 taxis is nearest you--and available--and can send it immediately. If there is no cab in your area, the next closest one is dispatched automatically.

Yellow Cab is guiding its taxis with the same technology that the Defense Department developed to provide navigation systems for its missiles and aircraft: the satellite-based global positioning system.

A GPS set in every cab continually tracks each taxi’s location and transmits it to the dispatcher, who can follow it on a monitor. The system automatically searches for the nearest taxi that is available and even calculates the likely fare, based on estimated distance.

The system is a boon not only to customers. James E. Richards, Yellow Cab’s president, says it has transformed the way the firm does business, enabling managers to deploy cabs more efficiently, saving thousands of dollars annually on labor and operating costs, and all but eliminating cheating by drivers and dispatchers.

“I have to say I’m amazed myself,” Richards said.

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The revolution at Yellow Cab is only one of thousands of dramatic efficiencies being achieved every day at large and small businesses all over the country, using not only computers but also other high-technology equipment including lasers and biotechnology.

It is one of the paradoxes of today’s economy that this torrent of technology is not fueling a sustained increase in the nation’s productivity--the output per work hour of the average American worker.

The issue is important because rising worker productivity is what ultimately lifts the standard of living of all Americans.

Until 1973, U.S. productivity had been growing at a robust 2.5% to 3% a year, raising living standards sharply and helping, in general, to keep inflation low. Since then, however, productivity growth has averaged a disappointing 1%--and even less since the mid-1980s.

But productivity has spurted in the last six months, rising at a 2.4% annual rate last spring and 4.1% in the summer quarter. Analysts are sharply divided over whether these are aberrations or the start of a trend.

Even the Federal Reserve is split over the issue. In minutes of its November meeting, which were made public earlier this month, the Fed’s policy-setting Federal Open Market Committee cited the recent increase in productivity growth as one reason (along with the economic turmoil in Asia) that it did not raise interest rates. But several members of the panel were clearly skeptical.

Essentially, there are two schools of thought about the “productivity paradox.”

The optimists believe that the statistics are flawed and have not fully captured the recent gains in productivity, much as the consumer price index may be overestimating the inflation rate. In the last six months, they say, the productivity numbers are finally catching up.

Ed Yardeni, chief economist for the Deutsche Morgan Grenfell investment firm, argues that stepped-up productivity growth is one of the few credible explanations for the U.S. economy’s extended period of high growth and low inflation.

Yardeni believes that the improved productivity has led to a “new economy” that will enable the United States to enjoy continued economic growth and low inflation well into the 21st century.

“It really is the Goldilocks economy,” Yardeni said--as in, not too hot, not too cold.

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If Yardeni is correct, the benefits could be enormous. Even a 1-percentage-point rise in annual productivity, proponents argue, could add so much to the nation’s economy that the extra tax revenue would provide full Social Security benefits for the baby boom generation.

Others, however, are skeptical about such assertions. Barry P. Bosworth, an economist at the Brookings Institution think tank, argues that despite the gains of the last two quarters, the longer-term statistics “don’t support any notion that we have evidence of improving productivity.”

The past few quarters’ improvement in the statistics “are typical of what happens at this stage of any expansion,” when output is rising rapidly and business is trying to hold its hiring down, Bosworth contends. “We’ve heard these kinds of arguments before.”

Whatever the statistics show, the anecdotal evidence of productivity gains is impressive by any standard.

* Dell Computer Corp. now routinely asks customers to place their orders over the Internet, eliminating the need to maintain huge inventories, sprawling warehouses and large staffs. Its newest factory is being built without space for storing excess stock.

* Quad Graphics, a Milwaukee printing company, has installed robot-assisted stacking, storage and retrieval systems that enable it to use wider, faster presses and to save money on postage by automatically storing magazines by ZIP Code.

* Russell Corp., a textile maker in Alexander City, Ala., has put in computer-controlled spinning and cutting equipment that has helped it double production with the same number of employees and buildings. The system uses robots to help consolidate manual operations.

Those who contend that the economy is changing cite such examples, multiplied many times over, as strong evidence that productivity must be improving dramatically despite the sluggishness reflected by the official statistics.

They cite a variety of factors that may have spurred productivity in recent years: Globalization of the economy has prodded companies into seeking to reduce costs. Government deregulation has made firms more efficient. Business investment has mushroomed.

Finally, they point out that current techniques for measuring productivity are geared primarily to manufacturing, although the nation now produces about $1.50 worth of services for every $1 worth of manufactured goods.

Service firms have been among the biggest beneficiaries of the efficiencies generated by the computer revolution.

John T. Pearl & Associates, a Peoria, Ill., insurance firm, has just installed a computer system that has cut the time it takes for its underwriters to process applications from 45 days to less than 10.

Moreover, laptop computers enable field agents to provide instant rate quotes right in front of potential customers, quickly fill out detailed application forms and check on the status of applications. Customers can even buy policies over the Internet.

W. Michael Cox, chief economist at the Federal Reserve Bank of Dallas, points out that the government’s productivity-measuring techniques also do not adequately gauge improvements in the quality of goods or services being produced, which also adds to efficiency.

Cox points out, for example, that automobiles are built so much better these days that business buyers are saving millions of dollars on maintenance, operating costs and replacement. Yet efficiencies such as these, he says, are not reflected in the productivity figures.

Levi Strauss & Co. has installed computer-controlled lasers that enable it to cut and sew custom-fit jeans for individual buyers using measurements taken in stores and transmitted electronically to the factory--a service unimaginable even a few years ago.

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“The productivity is showing up everywhere but in the numbers,” Cox asserted.

Frank Stafford, a University of Michigan economist, argues that productivity gains have been all the greater because the statistics exaggerate the number of hours worked.

Although statistics suggest that Americans are working longer hours than they used to, time studies show that they spend a greater share of those hours--up to six each week--doing things not related to their work--from making personal phone calls to playing solitaire on computers.

Stafford’s conclusion: “The productivity slowdown in the mid-1970s and mid-1980s was substantially a measurement problem.”

Allen Sinai, economist at Primark Decision Economics, adds that productivity has not seemed to reflect the effect of new technology because it often takes years before the benefits of an invention can be fully exploited.

For the first several years after the invention of the microprocessor in 1971, he points out, computers were used as little more than efficient calculators and typewriters.

Likewise, when laser technology was invented in the late 1960s, officials at Bell Labs refused to patent it because they thought it had no application in telecommunications. Only after fiber optics came of age did Bell fully realize the laser’s potential.

Today, by contrast, imaginative firms have combined these and other technologies in all kinds of productive ways.

Soli-Flo, an Oceanside, Calif., company, uses lasers and the global positioning system to improve efficiency in dredging lakes and rivers. The GPS guides dredges automatically, eliminating costly overlaps caused by conventional surveying, which is imprecise and slow.

Thanks to sophisticated software programs, even companies with worldwide reach can keep daily tabs on an array of operations.

Wal-Mart, for example, has developed a computer software system that enables it to download data from cash registers across the country every night and use the information to replenish and distribute its inventory--even notifying suppliers when to step up their production lines.

Businesses have needed time to get used to such innovations. Gerry Gustafson, a Rockford, Ill., plastics manufacturer, says his firm did not begin investing in the new high-tech equipment until it was nearly driven out of business by better-equipped competitors.

“We’ll never become obsolete again,” he vowed.

For all the anecdotal evidence, there are still plenty of skeptics.

David A. Wyss, an economist at DRI/Standard & Poor’s, predicts that the spurt of productivity growth last spring and summer will prove to be a fluke. “I don’t think this is the start of the New Economy,” he said.

Larry Mishel of the Economic Policy Institute, a liberal research group, is another defender of the productivity data.

While productivity may have been underestimated, he says, the error is unlikely to be very large--maybe the difference between growth of 1.1% a year and 1% a year--and certainly will not support assertions that the improvement has led the country into a New Economy.

Daniel E. Sichel, a senior economist for the Federal Reserve Board, is a skeptic for a different reason: No matter how dazzling the computer revolution may seem to Americans fascinated with images on a monitor, he says, its effect on productivity has been overstated.

Computer technology constitutes only 2% of business investment in capital stock, Sichel says, and much of that is simply to replace older computers, which become obsolete in almost no time.

Here in Dallas, however, Yellow Cab President Richards says technology’s effect can scarcely be overestimated. Far from being just a gimmick, he says, the new system has already sped up taxi response times, saved money on operations and provided more capacity for growth.

Drivers love it because they no longer have to scramble to learn the best times and places to wait for customers or to defend themselves against other drivers who may try to poach. In-cab monitor screens show every cabby where the busiest parts of town are.

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It also has virtually eliminated the payola system that enabled dispatchers to play favorites by saving choice fares for those cabbies who were willing to slip them a few dollars each month. These days, the computer picks out the nearest available cab. It’s incorruptible.

Another benefit: Cabbies can signal the dispatcher quietly--with the touch of a button--if they get into an accident or a passenger pulls a gun on them. The dispatcher can give police the taxi’s location without having to ask the driver.

“There’s just no reason to have to sit around idly anymore waiting for business to come my way,” said Brad Elliott, a 24-year-old driver who joined the company a year ago. “For myself, I love it. It’s a great system to have in place.”

Richards concedes that the system was so full of bugs during its first few months that the company nearly boxed it all up and sent it back to the manufacturer.

Drivers pushed buttons willy-nilly, overloading the emergency signal. The system crashed repeatedly. Errors and gaps in the database left the system so hobbled that the company once was unable to send a taxi to a woman who needed to get to a hospital.

“We were certainly unhappy for a while,” Richards said.

No more. Now he reports that driver turnover is down substantially, the firm is attracting applicants from other companies and Yellow Cab is expanding its business steadily without adding dozens of new employees.

“I don’t think we’ve yet realized all the potential,” he said.

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The Productivity Record

From 1948 to 1973, U.S. productivity, as measured by the output per work hour of the average American worker, grew at an average of 2.8% a year, raising living standards and helping to keep inflation low. Since then, however, productivity growth has averaged a disappointing 1%. But productivity has spurted in the past six months, rising at a 2.4% annual rate last spring and 4.1% in the summer quarter.

(Please see newspaper for bar chart information)

Source: Bureau of Labor Statistics