Last month, I argued in this space that to make America truly flourish again presidential candidates should embrace a technology and economic policy agenda that spurs three main drivers of dynamic enterprise and overall growth in the 21st century: innovation, productivity, and competitiveness. Since then, two leading candidates have given speeches and made comments that have intensified the debate on these issues – productivity, in particular – to an extent that is only possible under the hot klieg lights of a presidential campaign. In the process, they also have illustrated some of the unfortunate shortcomings of prevailing economic thought.
First, a bit of context: Productivity is a simple concept that refers to how much we produce per hour of work. If a lawn crew gets better mowers and is then able to cut 12 lawns instead of 10 in the course of an 8-hour day, then that’s a 20 percent increase in productivity. The reason the United States enjoys one of the highest standards of living in the world is because technological innovation has driven an eight-fold increase in productivity in the last century, such that the average worker now produces in one hour what the average worker used to produce in an entire day. In short, we earn more now because we produce more.
Hillary Clinton recently gave a major economic address in which she rightly argued, “We must raise incomes for hard-working Americans so they can afford a middle-class life. We must drive strong and steady income growth that lifts up families and lifts up our country.” So far, so good.
But she and many Democrats no longer trust that productivity benefits workers. Her campaign took to social media to circulate a chart that sums up their skeptical view. It shows two diverging trend lines, with productivity rising 240 percent since 1950 while wages rose just 108 percent, and it concludes, “You’re working harder but your wages aren’t going up.” The implication is clear: There is no point in supporting policies to boost productivity, because it no longer benefits average American workers.
Jeb Bush meanwhile stirred up controversy on the opposite side of the productivity-and-growth debate when he said Americans would “need to work longer hours” to meet his target of 4 percent real annual economic growth. The governor’s team later clarified that he was referring only to part-time workers, not suggesting those with full-time jobs would need to put in longer weeks. But rather than dwell on the “gotcha” aspects of Mr. Bush’s comments, it’s more interesting to ponder economists’ reactions to his goal of 4 percent growth. Most, even conservatives, have been quick to dismiss Bush’s aspiration as pure political fantasy. George Mason University economist Tyler Cowen, for example, said, “I don’t think policy can summon up such a growth rate ‘on demand.' ” The American Enterprise Institute’s Kevin Hasset echoed that sentiment, asserting, “Productivity’s a real darn hard thing to operate on.”
These two assertions neatly encapsulate what is wrong with the debate about whether and how to raise productivity: Those on the left don’t believe it would do any good, and those on the right don’t think it can be done anyway. Both are wrong.
The liberal argument that productivity doesn’t matter to the average worker is based on a misreading of labor-market data. As economist Stephen Rose has shown using newly released figures from the Congressional Budget Office, real median income actually grew substantially from 1979 through 2007 (somewhere between 30 percent and 49 percent, depending on the definitions of income), while at the same time, real productivity didn’t grow as quickly as official government figures. The reality is that lower- and middle-income workers have gained a great deal from increases in productivity and likely will continue to in the future. It would therefore be a major mistake for the next president to forsake an ambitious productivity agenda in favor of more equitable distribution of a fixed “pie.”
On the other side of the coin, the conservative view that there’s nothing we can do to raise productivity is also false. There are a host of economic policies that can lead to faster productivity growth. But to implement them, we need a president who takes on political orthodoxy on both the right and left and unabashedly calls for a national productivity policy.
The first step should be tax reform that spurs investments in better “tools,” because it is through better tools – not just more tools – that we get to be more productive. Unfortunately, compared to 30 years ago, companies in America invest 30 percent less in new tools. That needs to change if we are going to ramp up productivity growth rates to at least 2.5 percent a year, which was the average in the decades following World War II.
One way to move things in the right direction would be to reward companies with a tax credit when they invest in new machines, equipment, computers, or software. We did that in the post-War era, and it paid off in robust productivity growth and all the ancillary benefits it brings. But then, in the 1980s, under the rigid belief that the business tax code shouldn’t pick “winners,” Congress eliminated the investment tax credit. And guess what happened? Investment in new tools fell. It’s time to bring back the investment tax credit that provides businesses with a tax credit of 25 cents on the dollar when they increase their spending on new tools 75 percent above their previous three-year average.
But new tools are not enough; workers also need the skills to use those new tools effectively. Otherwise, economists have found that you can have two kinds of economies – a high-road one, which means firms are using advanced tools and workers have advanced skills, or a low-road one, which means workers are using yesterday’s tools with yesterday’s skills. We’ve got too much of the latter in America today and not enough of the former. In fact, we have been going in the wrong direction for 20 years. While the amount that companies invest in new tools has dropped 30 percent, and the amount they invest in training their workers has dropped almost 40 percent as a share of gross domestic product.
That’s why companies also should get a similar 25 percent credit for any investment in worker training that goes beyond three-quarters of their average expenditure over the previous three years. A high-road tax credit such as this would boost productivity – and, by lowering the effective tax rate for American companies, it also would help them compete internationally while attracting investment to US shores. Finally, it would help workers get the skills they need to better navigate the turbulent seas of this new economy.
Tax reforms such as these are essential, but not sufficient to spur the productivity and wage growth we need. It will take a holistic strategy led by a president prepared to consider all policies – tax, trade, spending, regulation, and others – through an innovation and productivity lens. One key step will be to establish a national productivity commission, as Australia and several other nations have done, to analyze productivity challenges by industry and recommend policies to respond. But all that will require moving beyond outmoded economic thinking from the left and the right.
Robert D. Atkinson is the founder and president of the Information Technology and Innovation Foundation, a non-profit, non-partisan think tank whose mission is to formulate and promote public policies to advance technological innovation and productivity internationally, in Washington, and in the states.