Keeping the gains

Pumping up the effort to keep government regulations from offsetting productivity gainsRecent reports indicate substantial gains in productivity for the U.S. economy, which means inflation is more likely to remain in check. Increasing productivity gains imply higher returns on investment that will further increase investment spending. This, in turn, may help to hold the line on prices.However, a recent

Pumping up the effort to keep government regulations from offsetting productivity gains

Recent reports indicate substantial gains in productivity for the U.S. economy, which means inflation is more likely to remain in check. Increasing productivity gains imply higher returns on investment that will further increase investment spending. This, in turn, may help to hold the line on prices.

However, a recent article published by the Federal Reserve Bank of Richmond has some sobering views on just how reliable our measures of productivity really are. Findings suggest that the growth in productivity for the major industrial countries is slower than in recent decades.

Since productivity gains are correlated with an increase in the standard of living, any flattening or decline in this measure means the standard of living will follow suit.

But a monkey wrench has been thrown into our analysis: We may not be measuring productivity correctly in the first place. And we don't know whether we're over- or understating it.

History suggests that our production systems are mature, and that we are in need of revolutionary changes to jump to the next level of productivity. Information processing may, in fact, be just such a change.

The transportation industry offers a good example. The use of information processing to determine shipment levels, timing, scheduling, and tracking has reduced the level of inventory in the system. Benefits include a reduction in the carrying cost of inventory and the freeing of capital. But more subtle benefits, such as positioning scarce inventories wisely, have led to more efficient management of distribution systems.

Investment in the control mechanisms for these systems has led to an overall reduction in the cost of these systems, as well as of their implementation and maintenance. What had been available to only the largest of shippers can now be readily justified for significantly smaller firms. This should mean a continued increase in transportation productivity.

Unless, of course, we smother the system, despite the best of intentions. But more on that later.

For optimal operation, the system needs access to shippers and receivers, equipment that can be operated efficiently, motivated workers, and sustainable returns on capital. Assuming the industry can achieve reasonable returns, the remaining issues loom in importance -- and are often beyond the control of the carrier.

Recent studies indicate that drivers are spending an inordinate amount of time waiting to load and unload. A reduction in "nondriving" time would lead to lower costs, less road congestion, and less driver fatigue. Savings can then be passed on to the shippers and receivers. All parties win.

Efficient operation of equipment is one area where fleets don't always have complete control -- thanks to government intervention. One example is the effort by the State of California to sue operators of diesel-powered equipment -- singling them out in its efforts to reduce air pollution. Although alternative fuels may help solve the pollution problem, the possible decrease in fuel efficiency could result in reduced productivity.

It's sometimes difficult for people to realize that there's going to be a trade-off between the quality of life related to clean air and the quality of life related to cost-effective access to goods and services.

Another area where government intervention could hamper productivity is the effort to revise hours-of-service rules. This speaks to the issue of keeping employees motivated by enabling them to earn a reasonable income. Changes to these rules could make it more difficult for some drivers to maintain their income level.

Regardless of the original reason for changing the rules, they need to be considered in light of the existing system and the related impact for maintaining or improving productivity. Changes to these rules could also decrease equipment utilization and drive shipping costs up.

Progress does require change, but change can also lead to economic decline. We need to be extraordinarily vigilant that well-meaning changes do not have an unintended negative impact on our economy.

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