U.S. multifactor productivity trends for 2001, for the private non-farm business sector, released with the minimum possible publicity April 8, show a drop in productivity of more than 1 percent in that year. Where then is the “productivity miracle” so beloved of Fed Chairman Alan Greenspan and others?

Multifactor productivity, in this case a measurement of output per unit of both labor and capital, is less well known than labor productivity, the statistic whose increased growth rate since 1995 Greenspan has so lauded. However, it is a much better measurement of the true increase in the economy’s productivity, caused by adoption of new technology or management and labor techniques.

Labor productivity fails to account for the use of capital in the economy; thus an economy that is becoming more capital intensive may see an increase in labor productivity while multifactor productivity declines. However, an increase in capital intensity in an economy is not in itself an indication of its greater true productivity. To take an extreme example, an economy such as Venezuela’s, in which a highly capital intensive resource industry is combined with highly capital intensive “prestige projects” funded by the government, will often show quite a high labor productivity compared to an economy such as Taiwan, in which historically capital has been scarce and labor productivity growth has been due to genuine improvements in labor utilization and technological advance.

Of course, an increase in capital intensity is precisely what happened in the United States in the 1990s. On an index of 1996=100, labor inputs into the U.S. economy increased from 91.8 in 1993 to 110.1 in 2001, a rate of increase of 2.3 percent per annum over the eight years of the Clinton administration. “Capital services” inputs, on the other hand, increased from 89.4 in 1993 to 130.5 in 2001, a rate of increase of 4.8 percent per annum, accelerating somewhat over the period. Output of the private non-farm economy increased from 88.4 to 120.1 over the same period, a rate of increase of 3.9 percent per annum, lower than that of capital services inputs.

The result was that over the 1993-2001 period, although output per labor hour increased from 95.3 to 111.6, a rate of increase of 2.0 percent per annum, output per unit of capital actually declined, from 99.0 to 92.0, a rate of decline of 0.9 percent per annum. Thus multifactor productivity, which combines the two, increased only from 97.2 to 103.3, an increase of 0.76 percent per annum.

Which year you start with doesn’t matter much. If you start in 1995 (as do Greenspan and the productivity shills) then labor productivity’s rate of increase over 1995-2001 is indeed higher, at 2.3 percent per annum, but capital productivity’s rate of decline is also higher, at 1.4 percent per annum, and multifactor productivity growth, at 0.78 percent per annum, is almost identical. In 2001 itself, labor productivity increased by 1.2 percent, thus giving Greenspan a favorable “headline number” but capital productivity declined by a shocking 4.1 percent, to give an overall multifactor productivity decline of 1.1 percent.

Over the long term there is no sign of faster multifactor productivity growth in the 1990s. Multifactor productivity growth averaged 1.91 percent per annum in 1948-73, minus a tiny 0.01 percent per annum in the sluggish decade of 1973-83, 0.71 percent per annum in the recovery decade of 1983-93, and as shown above 0.76 percent per annum in 1993-2001. No great increase after 1993 in other words. The drop in 1973-83 is readily explicable; one of the major inputs into the U.S. economy, energy, quadrupled in price in 1973, and it took a decade to rebalance the economy to fit the new circumstances.

The most remarkable statistic is that multifactor productivity growth in the years of the “miracle” after 1995 was less than half that of the quarter century 1948-73.

Of especial interest is the trend for capital productivity over the period. Private non-farm output per unit of capital, on the same index basis of 1996=100, peaked at 134.5 as long ago as 1966, having trended generally but not uniformly upwards over the period since statistics began in 1948. It then declined quite sharply, at a rate of more than 2 percent per annum, to a low of 96.7 in the recession year of 1982. Since then it has fluctuated, showing no major trend either way until 1999, then declining sharply again to a record low since records began of 92.0 in 2001.

From this it is pretty clear that, at least in the peak bubble years of 1999-2001, capital was being used very inefficiently. For example, the $100 billion of private equity funding committed in 2000, about which there was at the time so much rejoicing, has nearly all been frittered away.

There is another, very interesting long-term conclusion to be drawn from these capital productivity figures, and it goes to the very heart of the U.S. economy. Capital productivity was very much higher, and growing, in the large company, low corporate restructuring years of the 1950s and 1960s than it has been in the entrepreneurial years of the 1980s and 1990s.

Essentially, the long boom after 1982 treated capital as a more or less free resource, and diverted increasing resources into remuneration of management and financial services chicanery. The fast moving, entrepreneurial corporate structure of the 1990s is in fact NOT the most efficient way to organize the U.S. economy. Much better was the structure of the 1960s, when business relationships were stable, labor was assured of a job for life and a decent pension, management was adequately but not excessively remunerated, and even high-tech companies such as Polaroid and Xerox took decades, not a few years, to reach the upper echelons of the Fortune 500. The costs of business relationships you can’t rely on, management that steals from shareholders, and a workforce that has to look for a new job three times a decade are enormous, and wholly inadequately accounted for in conventional economic analysis.

This is not to say that the United States should become more like Germany or Japan, countries in which stable corporate conditions still more or less hold (it is notable that both countries’ attempts to become fast moving and entrepreneurial — Japan in the late 1980s and Germany in the late 1990s — were conspicuous failures and financial disasters even by Nasdaq standards.)

The sclerosis in Germany and Japan today is due to a further factor: grossly excessive and rapidly growing government spending. According to statistics from the Organization for Economic Cooperation and Development, German public spending was 45.7 percent of gross domestic product in 2001, compared to an average of 34.2 percent in the 1960s, when that country enjoyed rapid growth. Japanese public spending was 36.7 percent of GDP in 2001, compared to only 17.5 percent in the high-growth 1960s.

U.S. public spending, on the other hand, lower than most other countries in 2001 at 31.2 percent of GDP, averaged only 27.0 percent of GDP in the 1960s. The United States of the 1960s may have been a big company economy, but it was not dominated by the government in the way that Japan and Germany are today, and was therefore able to enjoy a much healthier rate of economic and productivity growth. The dynamic Germany and Japan of the 1960s, not their sclerotic bureaucratized successors of today, are the model that the United States should aim for.

The corollary of a high utilization of capital in the economy, with low productivity in the deployment thereof, is a lengthy period of substandard returns on capital going forward. Far from suggesting that the current still elevated levels of the U.S. stock market are appropriate, the productivity statistics of the last decade, if examined closely, suggest that the United States is in for a lengthy period of major economic restructuring, with low returns to capital, and a stock market valuation that is lower than the historic mean, not higher. We’re heading not just for Dow 5,000, but for Dow 3,000.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.