Economists and economic commentators continue to focus on whether or not a recession is bearing down on the U.S. economy. The debate is of dubious importance when you consider that a recession, as statistically defined, consists of two consecutive quarters of real decline in GNP. And real GNP, as defined by the government, in no way measures "quality of life" in the U.S. That is, in the extreme, if government policies are directly or indirectly responsible for increasing personal and social tensions in the U.S. to the point where every citizen must hire a lawyer, an accountant and a psychiatrist for purely defensive reasons, the incomes of the lawyers, accountants and psychiatrists will soar, and the government will record a boom in real GNP.
The economy has been in a "long boom" since 1975 in just this fashion, with real GNP rising and life quality declining, the process obscured both by government definition and by inflation. The key barometer for corporate managers is the stagnation of American productivity, output per man hour in a firm, stripped of the national averages that include output per man hour of lawyers, accountants, psychiatrists, etc. The collision of inflation and progressivity in tax rates in the 1970s has been steadily draining incentives from the U.S. economy, reducing its efficiency. National productivity, which averaged 3 percent per year in the 1950s and 1960s, fell steadily to zero in the 1970s. As capital and labor were no longer rewarded for their efforts with real financial gains, they reduced their work effort to compensate. The decline in employe productivity is now running at a minus 5 percent annualized rate. As corporate managers, you should expect this problem to intensify in the remainder of 1979.
This is the reason: The stock market is telling us that the kind of "recession" the economy felt in 1974-75 is not on the horizon. The price of gold, however, is our best barometer of future statistical inflation, and it is hovering at $275 to $285 per ounce in global markets. The price of oil on world markets has been pushed up by 50 percent this year in response to the decline in the U.S. dollar relative to gold. All prices will rise inexorably in this train, and the inflation of the next several months will have especially damaging effects on employee productivity. This is because the Carter administration is attempting to hold wages and prices down via controls to 7 percent while the value of money wages is eroding at double that rate. In the first year of the control program, which ends September 30, corporate managers had leeway to increase incentives to managers and workers by giving, say, half of them bigger increases in this fiscal year, with the aim of taking care of the rest the same way on October 1, the new government fiscal and program year. This leeway ends this October, since the first cohort of workers and managers cannot be compensated for the decline of the dollar's value without putting the company out of compliance. Even if there were no wage-and-price guidelines, it would be difficult for management to raise pre-tax financial rewards to employees fast enough to give workers after-tax rewards sufficient to maintain their productive levels, because of the progressive feature of the income-tax system.
The entire economy will feel these phenomena in sharpened terms as the rest of the year unfolds. Workers have been accumulating personal debt as a survival tactic, both pushing off the day of reckoning in drastic adjustment of their life styles, and also hoping for wisdom to strike their national political leaders in a way that might reverse the squeeze in a way that increases the efficiency of the entire economy — which would permit them to keep their homes, vacations, school their children, etc., and also pay down accumulated personal debt. More and more people have their backs to the wall in this situation, and in the next six months many will be pushed over the edge. A rise in crime rates, alcoholism, vandalism, mental health, bankruptcies and all forms of personal suffering are the chief results that appear at the aggregate level of the economy, but the same pressures cause productivity declines at the level of the firm.
This does not suggest that of every cohort of 100 workers in your firm, each individual will work 5 percent less, to produce a net 5 percent loss in productivity. One worker in that cohort whose "back is to the wall" in that he or she is distracted by consumer debt, fatigue in working two jobs, marital problems growing out of desperation in family finances, etc., will cause a breakdown in the entire production process by a "simple oversight." Consider the likelihood that this is precisely what occurred in the recent crash of the DC-10: One maintenance worker, being rushed by one supervisor, both distracted by personal problems growing out of the national economic decline, slips up in detecting the pylon crack that brings down the airplane. The entire economy, including your firm, feels the consequent decline in productivity.
Expect an intensification of this condition in the months ahead, unless there is movement away from controls instead of movement toward greater controls, if there is movement toward passage of the new energy tax instead of movement toward downward adjustment of tax rates, and if the price of gold rises further instead of declining.
In your own company, there are always untapped measures for rewarding workers and managers out of straight payments of taxable cash. Any measures that relieve the emotional anxieties of your workers on the line, helping them get their backs from against the wall, will be of help in sustaining productivity levels. The most important steps all involve increased communication with the work force, especially through labor unions and other intermediaries. Hope for the future must be sustained, through management's broadcasting of its awareness of why individual workers are facing these debilitating problems. Labor leaders should be receptive to such discussions, for if they cannot contend in some way with the impact of the national economic decline on the personal lives of their constituents, influence will slip to the shop steward level, as it did in the U.K. when Britain went through this same problem in the 1950s. The problem is no less severe where the work force is white collar and professional. Set yourself to thinking now about how to get in front of this problem, how to cross this threshold that the entire economy is heading into, and you will at least be ahead of your competitors.