Monday, August 29, 2011

Productivity revolutions can hurt

Program update: thanks to Hurricane Irene, I am held over in Ireland -- a very nice place to be stuck, I must admit.  Continuing squibs based on current reading....

In December 2009, Atul Gawande drew an extended analogy between the agricultural revolution of the early 20th century, sparked by an array of creative government programs that promulgated improved farming techniques, and the welter of cost control measures packed in the Affordable Care Act, which collectively may have the potential to radically lower healthcare costs while improving quality. Here's Gawande's overview of what happened in agriculture, circa 1900-1920:
The United States did not seek a grand solution. Private farms remained, along with the considerable advantages of individual initiative. Still, government was enlisted to help millions of farmers change the way they worked. The approach succeeded almost shockingly well. The resulting abundance of goods in our grocery stores and the leaps in our standard of living became the greatest argument for America around the world. And, as the agricultural historian Roy V. Scott recounted, four decades ago, in his remarkable study “The Reluctant Farmer,” it all started with a pilot program....

What seemed like a hodgepodge eventually cohered into a whole. The government never took over agriculture, but the government didn’t leave it alone, either. It shaped a feedback loop of experiment and learning and encouragement for farmers across the country. The results were beyond what anyone could have imagined. Productivity went way up, outpacing that of other Western countries. Prices fell by half. By 1930, food absorbed just twenty-four per cent of family spending and twenty per cent of the workforce. Today, food accounts for just eight per cent of household income and two per cent of the labor force. It is produced on no more land than was devoted to it a century ago, and with far greater variety and abundance than ever before in history.
What I'm learning from David M. Kennedy's Freedom from Fear: The American People in Depression and War, 1929-1945  is that however good this 'revolution' proved to be for consumers, it was absolutely wrenching for farmers. According to Kennedy, American farmers (who still made up 30% of the U.S. population in 1930) had been suffering a Depression of their own since the end of World War I, when prices collapsed. The problem was essentially massive oversupply, triggered by those wonderful productivity gains. The early New Deal remedy was the set of subsidies -- paying farmers not to grow certain crops -- that plague us to this day. Then as now, too, those subsidies disproportionately benefited large holders -- particularly southern landlords, who responded to incentives not to grow by depriving their sharecroppers of their less-than-bare-subsistence livelihood.

Also interesting -- and I'll confess to speaking from a very thin knowledge base here, and in mid-course in Kennedy's account -- is that the agricultural subsidies were ideologically of a piece with the early New Deal's approach to industry, which was to foster cartels that would regulate (i.e., curtail) production, thereby boosting prices.  The working assumption was that U.S. productive capacity had so far outstripped demand that production had to be curtailed. Of course, post-war, U.S. consumption capacity (and access to overseas markets) increased beyond the dreams of Croesus -- and I imagine that this was true in agriculture as well as in other industries.

To extend Gawande's analogy, could a productivity revolution in healthcare also cause a hiring recession in healthcare?  To some extent, it may already be happening, as hospitals and physician practices cut costs in anticipation of Affordable Care Act provisions coming online in 2014.


  1. "The early New Deal remedy" was not, in fact, "the set of subsidies...that plague us to this day." Rather, it was the creation of the "Ever-Normal Granary" system, in which government purchased excess crops in a boom year and sold them in bust years to moderate swings in price. The subsidy system, rather, results from a Nixon Administration decision to replace that system with subsidies. Michael Pollan tells the tale briefly in a longer article but you may find the relevant section by searching for the word "normal": or

  2. But FDR's AAA did pay farmers not to grow specific crops.