Advice for a world in search of innovation

Like never before, the world can easily track every high or low note in America’s 2016 presidential contest. What is it hearing? According to long-time billionaire investor Warren Buffett, the “candidates can’t stop speaking about our country’s problems.”

That’s hardly new in a democracy. To make promises, a politician often exaggerates the real or perceived woes of voters. Yet, says Mr. Buffett, the negative drumbeat on the campaign trail has convinced many Americans that “their children will not live as well as they themselves do.”

The world’s largest economy, in other words, no longer believes it will enjoy the prosperity that comes from rising productivity, which is defined as the ability to do things better and faster through adaptation of inventions or new ideas in human and organizational capital.

Both America and the rest of the world should avoid such pessimism, writes Buffet in a Feb. 27 letter to the shareholders of his Berkshire Hathaway investment company.

“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start,” he states. “America’s golden goose of commerce and innovation will continue to lay more and larger eggs.... Today’s politicians need not shed tears for tomorrow’s children.”

He cites productivity gains made since he was born in 1930 that have come from innovation. He also says the nation’s gross domestic product per capita has grown six-fold to $56,000, even after taking inflation into account.

By traditional measures, productivity growth in the United States has been about one percent a year since the 2008 financial crisis. That is good by global standards but far less than a half century ago. Much of the world is now focused on how to boost productivity to end a global economic slowdown.

At their February meeting, finance ministers and central bankers from the Group of 20 wealthy nations decided they must focus on structural reforms to boost productivity rather than pursue financial stimulus. And in a report for the G20 meeting, the Organization for Economic Cooperation and Development said it was a “reform priority” for these countries to promote entrepreneurship, worker mobility, and higher productivity.

The big issue in discussing productivity, however, is how to measure its modern effects, such as vacation home swaps via Airbnb or the use of smartphones as mobile offices. It was easier a century ago to measure the benefits of cars, electricity, or airplanes. But advances in digital technologies are more diffused and intangible.

The digital age’s flow of bits and bytes differs from the flow of merchandise. In a recent study, the McKinsey Global Institute estimated that wealth from international data flows exceeded trade in material goods in 2014, reaching $2.8 trillion that year.

“We’re living through an era where the nature of production and consumption is changing rapidly,” says Yves Mersch, a member of the Executive Board of the European Central Bank. The changes make it difficult to measure what is being produced or how efficiently. This calls for policy-makers (and politicians) to be humble about what can be known, he said.

What is certain is the rapid pace of change by the most innovative firms, requiring people to retool themselves or move to new jobs. In an average mature economy, around 50 percent of productivity growth comes from such reallocation, said Mr. Mersch. Each society must adapt to this new challenge to keep raising its standard of living.

And election candidates in the US must focus on what Buffett calls the country’s “secret sauce,” or its ability to sustain productivity. “Too few Americans fully grasp the linkage between productivity and prosperity,” he wrote. So politicians must lead on that point rather than play to voter fears.