Has U.S. Productivity Gone Hiding Overseas?--Heard on the Street

By Justin Lahart Features Dow Jones Newswires

Where did America's productivity go? Some of it may be hiding in Bermuda.

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First-quarter productivity figures came out Thursday, and they weren't good. With the economy faltering even as employers expanded payrolls, the Labor Department's measure of how much a typical worker produced in a typical hour fell an annualized 0.6% from the fourth quarter. Versus a year earlier, productivity was up just 1.1% -- a miserable number that is in keeping with the weak productivity growth that has taken hold over the past decade.

Productivity is a key driver of economic growth, and economists have struggled to explain the slowdown. Some argue it is a result of weak capital spending, some say innovations aren't coming as fast as they used to. Still others say there is no slowdown and government data don't capture the gains from new technologies and from the harder-to-measure service sector.

But provocative new research argues that some of America's productivity gains are effectively being hidden offshore.

American companies have expanded their overseas operations in recent years. Commerce Department figures show that nonbank U.S. multinationals' net income from overseas production came to about $1.2 trillion in 2014 versus $500 billion a decade earlier. Much of that was the result of companies stepping up their global operations, but some of it was a result of them moving intangible assets such as intellectual property overseas in order to shift income to low-tax countries.

Commerce Department figures tell the tale. In 2014 U.S. multinationals held about $1.8 million in assets overseas -- anything from factories to patents -- for each worker they employed overseas, but that varied a lot by country. In Canada, for example, they held $1.2 million in assets per employee, but in Ireland and Bermuda -- popular destinations for their low tax rates -- it was $10.3 million and $117 million, respectively

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The outsize asset-to-employment ratios of some countries are an indication that a lot of economic activity is being assigned there, argues University of Minnesota economist Fatih Guvenen. Because the activity isn't being assigned to U.S. workers, they appear less productive. That wouldn't matter if, as appears to be the case in Canada, that economic activity is coming from workers doing their jobs. But Bermuda, where it looks as if assets such as intellectual property have been stashed, appears to be getting credit for productivity that really occurred in the U.S.

Mr. Guvenen and colleagues from Penn State and the Commerce Department calculate that from 2004 to 2008 -- the period when the U.S. productivity slowdown manifested itself -- productivity growth would have been about 0.25 percentage points higher than the 1.5% annual rate shown in the official statistics. That doesn't overturn the fact of the productivity slowdown, but it does mitigate it.

And it makes a difference in dollar terms. The economists' productivity adjustments imply U.S. gross domestic product grew $250 billion a year more than the official numbers show since 2005. It doesn't take long for that to really add up.

Write to Justin Lahart at justin.lahart@wsj.com

(END) Dow Jones Newswires

May 04, 2017 13:40 ET (17:40 GMT)