Imagine a room full of economic forecasters discussing the state of the
economy and its future performance. Armed with reams of data, all are
well versed on key economic indicators, and each wants to look smarter
than the next.
So, let's ask them what the growth rate of U.S. labor productivity
was last year.
"Oh, OOOH!" grunts John E. Conomist, waving his hand furiously.
"That's easy4.3 percent."
Good. But that number is just for the private business sector.
Who knows what productivity was for the nation's public sector?
Now imagine the vacuum silence of an iceberg floating past you
in the ocean. That is the sound of a blank stare from our forecasters.
But they are hardly alone, for no one on the planet could answer
that question with more than a guess, and it's indicative of how
little we know about roughly one-fifth of the U.S. economy.
To many, it's a case of so-whaddu-I-care. Labor productivityan
economist's term for work efficiencyis not exactly conversation
fare at cocktail parties ("Say, I heard your son increased his
trash removal productivity by almost 8 percentbravo!").
Insert "government" into that discussion and it's iceberg-city.
Public sector productivity might lack sex appealit won't,
for example, put money directly back in your pocket like a tax
cut. But over the long haul, it can get your tax dollar to go
further, and possibly demand fewer of them in the future. In some
ways, productivity's "need to know" applies more to the public
than to the private sector, particularly if one looks beyond the
impact of private sector productivity on tax collection forecasts.
Private companies are driven by competition, and, regardless
of the average productivity rate, high-achieving companies should
out-compete lower-achieving ones. Such a performance lever is
largely missing from government, which could have dramatic long-term
Richard Murray is chief economist with the Swedish government
and one of the world's foremost experts on government productivityone
source called him a "bottomless well of experience and wisdom
in this field." Murray said there will always be demands for greater
efficiency in the public sector. But virtually all developed countries
are staring down a resource dilemma, and government productivity
will have a lot to say about how serious the matter becomes.
"It seems at this moment of time [productivity is] more crucial
than ever since there will be high demands on service provisionsfrom
students, elderly, retired, nonworkingwhile at the same
time the working population diminishes," Murray said. "This will
call for even higher tax rates unless we can increase efficiency."
Let's put the matter in more concrete terms. Annual spending
by local, state and federal governments in the United States exceeds
$2.5 trillion. Now, a goodly portion of government spending is
transfers to or for individuals (think Social Security and Medicare).
While some government workers are needed to process and manage
such payment systems, even a rapid improvement in government productivity
would not have much impact on total spending in such areas.
But so-called discretionary spendingappropriations for
things like defense, transportation and national parksis
also on the rise. At the federal level, nondefense discretionary
spending has risen by almost $110 billion, or 5 percent annually,
since 1991, according to the Congressional Budget Office. By comparison,
annual inflation averaged about 2.8 percent during this period.
Further down the government ladder, state spending increased 30
percent from 1988 to 1997 after adjusting for inflationnearly
twice the growth rate of the economy and more than three times
that of personal income, according to the Urban Institute.
Yet despite the increased spending across the board, we know
virtually nothing about the public sector's current productivity,
a formula that only fuels the fire of negative government stereotypes.
"A lot of [politicians and citizens] are hung up on stereotypes.
... We see this very simple assumption often that government isn't
productive," said Marc Holzer, chair and professor of Public Administration
at Rutgers University and executive director of the National Center
for Public Productivity.
In fact, research shows that government hasn't fared too poorly
in (admittedly dated) productivity comparisons with the private
sector. But no data have been collected since 1994right
about the time productivity rates took off in the private sectorand
none is expected in the foreseeable future because there is virtually
no pressure to do so, and because the task itself is fraught with
deep, though not unmanageable, sinkholes.
What's the big deal?
Productivity has always mattered, but has been grabbing more headlines
of late because it accelerated significantly in the private sector starting
in 1995, roughly doubling to better than 2 percent. As such, private sector
productivity has been an important factor in the nation's strong economic
growth, and today is tracked closely by everyone from the Federal Reserve
to stock market analysts to budget prognosticators.
In a February speech,
Federal Reserve Governor Edward Gramlich said, "Of all the statistics
that analysts pore over, productivity growth is surely the most important
in the long run." Productivity determines the long-run path of living
standards as well as projections for tax surpluses and entitlement trust
funds, he said, adding, "[w]ere national leaders able to pick one economic
statistic to be favorable, they would surely pick growth in productivity."
Despite this seeming importance, there is currently "nothing
going on" in the United States as far as tracking aggregate productivity
data for government, according to Donald Fisk, an economist and
productivity expert with the Bureau of Labor Statistics (BLS).
That wasn't always the case. In the early 1970s, there were a
number of colliding anxieties over inflation, international competition
with Europe and Japan, and rapid growth of government employment
from Great Society programs of the 1960s.
"There was great concern at that point over government productivity
and productivity in general," Fisk said. A snapshot report on
the issue by the General Accounting Office (GAO) springboarded
into an ongoing measurement program in 1973 whose "goal was to
improve federal productivity," said Fisk, who was intimately involved
with the effort.
At its height, the program collected productivity data on roughly
two-thirds of all federal employees, and also tracked a sample
of state and local government activities. At the federal level,
data were just one leg of a larger, strategic program for improvement
that included workshops, department reports and workplace consultants.
Every agency also had its own productivity coordinator who was
responsible for gathering and submitting output data for the centralized
report, Fisk said.
Going postal: USPS delivering productivity
Maybe letter carriers know someone is watching, and maybe
that's why they coined the mantra of "neither snow nor rain
... " to describe mail delivery by the U.S. Postal Service.
Although it's a favorite whipping horse for anti-government
types, no government entity embraces the concept of productivity
like USPS. A few other federal or quasi-federal agencies
have it on their radar. The Federal Reserve System, for
example, currently collects data on its payment services
and is investigating a more formal, comprehensive program
that would tabulate productivity for the payment services
for each of the Fed's 12 district banks.
But only USPS has a full-fledged tracking program on annual
labor productivity, as well as total factor productivity.
The reason is simplethe post office is required by
law to be self-sufficient, according to Richard Strasser,
USPS executive vice president and chief financial officer.
"We have our own built-in motivation." From 1990 to 2000,
labor productivity at USPS increased by 1.2 percent per
year, on average, according to USPS figures. Three years-1990,
1993 and 2000saw productivity grow between 2 percent
and 4.4 percent, representing the lion's share of overall
growth during this time. The productivity focus at USPS
is on the organization, not individual workers. "There's
not a lot [for individual workers] to do to work harder
or faster," Strasser said. Rather, productivity growth typically
come through systemwide improvements in processes and technology.
But being on the plus side of productivity isn't always
enough for success, either, even for a quasi-government
monopoly. In some ways, USPS is an example of the futility
of such measures for government, because there are extenuating
circumstances not encountered in the private market. USPS,
a $68 billion operation, expects to see a loss of at least
$2 billion this fiscal year, Strasser said, and will seek
a rate increase from the independent Postal Rate Commission,
piggybacking one implemented just last year. It has also
suggested cutting Saturday delivery.
The problem, at least in part, is one of price inflexibility,
Strasser said. "We don't have the ability to raise rates"
to cover delivery costs. Under universal service policy,
USPS is required to deliver to all addresses at uniform
and affordable costs. But every year, close to 2 million
new delivery destinations are added, which requires about
4,800 new letter carriers. E-mail and other competitors
have also cut into the volume of letters and packages, making
individual deliveries less cost effective.
The rate increase also does not reflect service quality
improvements at USPS. For example, on-time delivery for
overnight and two-day items have both increased by better
than 10 percent since 1995.
"Just adding delivery points year in and year out and
managing existing efficiency is a challenge," Strasser said.
But the program eroded over time. It got a big push out the
door in the early 1980s when the Office of Management and Budgetthe
project's lead agencydecided to get out of the game, or
rather, had it decided for them by newly elected President Ronald
Reagan. "[President] Reagan came in and everything was dismantled,"
said Holzer of Rutgers.
Other agencies followed the OMB out the door, and in 1983 BLS
was asked to carry the torch for the program, but efforts consisted
of "just data" for the next decade, Fisk said. "There was no formal
program to improve productivity and agencies lost interest." In
1994, spurred by budget cutbacks and lack of agency interest in
productivity results, the BLS decided to shutter the effort altogether
and "work on other things," Fisk said.
Some might be surprised to find that government productivity,
though the data are old and rife with caveats, compared fairly
well with those of the private sector. In its last official report,
BLS found that annual productivity in the federal government grew
by 1.1 percent from 1967 to 1994not too far from the 1.4
percent annual growth of the nonfarm business sector during the
same period. In fact, the two rates were identical from 1967 to
1982. But the rates diverged at this point, and from 1982 to 1994,
the federal government's annual rate of productivity growth was
less than half that of nonfarm businesses (0.6 percent to 1.3
But a better apple-to-apple comparison rightly involves the
service sector of the private market, because most of what government
provides are services. Here, government productivity looks pretty
good because productivity for the private service sector actually
declined by an average of 1 percent annually from 1989 to 1995,
according the Council of Economic Advisers (though many believe
measurement difficulties account for this anomaly, as discussed
A deadbeat, but in good company
Small consolation in this matter might come from the fact that the United
States is hardly alone. Fisk said he knew of "very little active research"
going on in any country. In fact, many countries don't even collect productivity
data on the private sector, to say nothing of their government complement.
Sweden and Australia appear to be the only countries dedicating significant
attention to the matter. Sweden has been measuring public sector productivity
since at least 1960, covering between 60 percent and 70 percent of both
federal and local government. Australia, on the other hand, is in the
beginning stages of establishing a governmentwide measurement program,
according to several government sources there.
But make no mistake, tracking government productivity is easier
said than done. Before you can measure productivity, you have
to first identify the outputs. Where there are physical goods
or outputs, productivity measurement is straightforward. Think
widget manufacturingcount the annual number of widgets produced,
the hours it took to produce them, and then compare to the previous
year, and, open sesame, you've unlocked the door to productivity
But defining government outputwhat we "get" for the tax
dollars spentis a morass, a Rubik's cube with a vague color
scheme. "Measuring the output of the government sector is not
so straightforward, as most of the things that governments provide
are services," said George Verikios, senior research economist
with the Australian Productivity Commission. "Services, by their
very nature, can be difficult to measure. For example, how does
one measure the output of the defense sector, the judicial system,
welfare programs [or] education?"
There have been past efforts, Verikios acknowledged, but national
statistical agencies in most countries "have done a poor job"
of measuring public output. For example, the Australian Bureau
of Statistics often used inputs like total spending to measure
changes in output. "This assumes no change in productivity over
time. Hence, only poor information on the productivity of services
sectors, particularly government services, has been available,"
Verikios said. One of the main reasons BLS got out of the government
measurement program was because it felt that even its private
sector statistics were "sketchy, at best," according to Fisk.
Rather than devote time and resources to reports no one was paying
attention to, "it was better to get a handle on private sector
Some problems are unique to government services. Renowned Yale
economist William Nordhaus said measuring productivity typically
occurs "at the molecular level with some existing dollar or financial
measure of an entity's output." Among other problems, he said,
"most government goods and services are not priced. By this measure,
then, conventionally measured output is zero."
But much larger problems plague the measurement of services
in general. "We have a tough time measuring service output whether
it's in the private or public sector," Fisk said. A recent article
by Edward Dean of the BLS noted that "for a surprisingly large
number of service-producing industries, there is a lack of agreement
among economists on the best definition of output." In fact, he
wrote, it was easier "to find fault with the output definitions
currently used than to specify [correct] definitions."
Still other measurement difficulties exist, like the fact that
current models do a poor job of capturing service improvements.
For example, would you rather wait in line to renew your driver's
license, or do so online? Simply counting the number of renewed
licenses as annual output would ignore the convenience factor
and resulting customer satisfaction realized by cyber renewal.
External factors can also heavily influence activity-based output
measureslike the effect of falling crime rates on police
bookings and court cases.
These factors make it difficult to gather much enthusiasm for
measuring government productivity. Because early measurement efforts
would likely produce low-confidence data, it's simply easier to
not start than to grope and plod a path to valuable and accurate
Hard, but not impossible
Even the Swedish modelthe most rigorous effort in place todayis
not without its uncertainties. An exhaustive 1996 report acknowledged
that "previous measures of productivity aroused considerable interest
and met with extensive criticism." Work has been done to incorporate quality
improvements and other factors, but the report concludes that deficiencies
were still present and results required further interpretation. "Shortcomings
in adjustments for quality," the report stated, "are not unique to these
[government-based] studies. Estimates of productivity within the private
sector ... suffer from the same difficulties."
Most sources believe the methodological obstacles can be overcome,
but only through sufficient effort and political backing. While
the basic research issues are complex, "governments, by way of
their national statistical agencies, have not devoted adequate
resources to this problem," Verikios said. "From a political economy
perspective, it is not hard to see why, as information on productivity
can be used to pressure governments to improve productivity or
reverse declining productivity in politically sensitive areas.
This does not mean that the issue of measuring output for difficult-to-measure
services is intractable. It is not. It's just that it has not
been given adequate attention."
For its part, the BLS has been working with employers with "touchy-feely"
jobs like architects, lawyers and others in the service industry
to better define outputs, Fisk said, calling it "the first step
of this very long road."
In fact, the private market now places more emphasis on so-called
"total factor productivity"a more complicated measure that
considers innovation, capital and other factors to assess organizational
productivity and success more comprehensively. But if tracking
public sector labor productivity is government walking, total
factor productivity is government runningto Mars and back.
For one, calculating total factor productivity requires good
information on costs. The GAO found that nearly 40 percent of
federal agencies did not receive unqualified or "clean" opinions
on their 1999 financial statements, including the Department of
Defense, which receives the lion's share of discretionary spending.
Reform flavor of the day?
Government watchers know that productivity is but another spoke in the
wheel of government reform. It is, in some ways, subsumed by a broader
current effort called performance measurement, which is intended to gauge
social and other benefits brought about by government programs and spending.
The movement got its federal legislative roots in 1993, when Congress
passed the Government Performance and Results Act. GPRA was designed to
shift government's focus away from activities, processes and inputslike
money spent, or staffing levelsand toward results.
One way to think about the two efforts is that productivity
focuses on supply factorsthe relationship between inputs
and outputs for a service or product. Performance measurement,
on the other hand, is preoccupied first with defining demandwho's
receiving what benefit from a government programand then
measuring how well an agency performs in meeting that demand.
Put another way, performance measurement looks more toward outcomes
of government spendingwhether and to what degree intended
results were achieved. Productivity looks instead to workplace
efficiency and innovation, and to a large degree assumes that
the work objectives, activities and results are properly aligned.
In some ways, it's a chicken-or-egg scenario. Productivity does
indeed matter little if the resulting outcome has no impact or
benefit, with the possible exception of saving marginal sums from
the pyres of government spending. "I don't care how fast a government
worker goes through a pile of paper until I know whether the pile
of paper needs going through" in the first place, according to
Jerry Ellig, senior research fellow at Mercatus Center at George
Mason University. Productivity numbers "don't tell me a thing
until I have a measure of the benefit" of government activity
GPRA is intended to fill that gap, and after six years of drafting
missions and goals, two dozen major agencies began reporting progress
in 1999. In its review of those annual reports, the GAO pointed
out that agencies had limited abilities "to produce credible program
performance and cost data" that would help identify improvement
opportunities. Such limitations "were long-standing, and they
will not be quickly or easily resolved."
A review by Mercatus Center found similar weaknesses regarding
the availability and reliability of cost and other data. Agencies
averaged a score of 31 out of 60 possible points for their GPRA
reporting. Nonetheless, while GPRA has its critics, "it's the
best lever we have [for government improvement]. It's what's there,"
Holzer of Rutgers said that while measuring productivity was
important, "you don't want to be hung up on the industrial definition
of efficiency." Other measureslike service quality and knowing
whether the services have their intended impact or benefitwere
equally important in grading government's use of tax dollars.
"We want to allow for a broader definition of what government's
But the very possibility (even likelihood) that government can
spend trillions of dollars and still be unsure whether it is achieving
intendedand also usefuloutcomes might lie at the heart
of the public's discontent with government. Murray, of Sweden,
said, "Why is [productivity] not considered crucial in the public
sector? Because of limited accountability. There will be no losses,
nor any bankruptcy, just increased taxes."
Simply knowing annual productivity won't necessarily get you
very far, as the previous federal attempt to measure productivity
demonstrated. Nordhaus, the Yale economist, said that the key
is how the data are used. "If you're not taking output numbers
seriously, then it's not going to matter" what productivity levels
Holzer believed that tracking public sector productivity could put government
on the path to greater public confidence, and act as a reminder "that
the public sector is important and is adopting various innovations." But
for any real changes to take root, "it has to come from the public and
from politicians," Holzer said. If pressure to track government performance
and pursue change "doesn't funnel down to politicians [from citizens]
it's not going to happen."