To solve our growth problem, we must first solve our productivity problem

America's sluggish economic growth over the last decade. To fix this, we must make productivity increases the central goal of US economic policy.

Issei Kato/Reuters/File
A humanoid robot works side by side with employees in the assembly line at a factory of Glory Ltd., a manufacturer of automatic change dispensers, in Kazo, north of Tokyo in 2015.

We cannot increase people’s living standards, or expect America to lead the world, unless we rapidly increase productivity.

But productivity growth over the last decade has been the slowest since the government started measuring it in 1947. This is why the economy has been mired in sluggish growth. Productivity is the measure of how much we produce in our work days; the economy expands as each worker produces more. Productivity thus equals growth.

The recent slowdown has given fodder to a cottage industry of economic pessimists who tell us we better get used to it. Former Treasury Secretary Larry Summers argues we are in an age of structural stagnation. Economist Robert Gordon laments the “fall of American growth.” And St. Louis Federal Reserve Bank President James Bullard says slow growth is the “new normal.”

This prevailing pessimism is not surprising since productivity has long been a mystery for most in the field of economics; historically, they have had little to say about why productivity grows, much less how to make it grow faster. Economist Alan Blinder speaks for many in the profession when he writes, “Nothing – repeat, nothing – that economists know about growth gives us a recipe for adding a percentage point or more to the nation’s growth rate on a sustained basis. Much as we might wish otherwise, it just isn’t so.” 

But the truth is we are not helplessly dependent on amorphous “market forces” to perhaps, someday, start raising productivity again. We are only consigned to slow productivity growth if we choose not to pursue a coherent national productivity strategy.

The next president needs to acknowledge this and make productivity growth the principal goal of US economic policy. This act alone would be an important step, for productivity is largely absent from the missions of the country’s major economic policy institutions, including the Department of Commerce, the Federal Reserve Board, the National Economic Council and the President’s Council of Economic Advisers. It’s high time they all made productivity “job one.”

After that, the next step is to spread out and begin tailoring productivity policies to different sectors of the economy. For example, the construction industry faces different challenges and opportunities than the health-care industry or higher education. It is wishful thinking to assume, as most economists do now, that all we can do to address sector-specific challenges is put in place the right business conditions (e.g., low interest rates) and “factor inputs” (e.g., a more educated workforce).

The next president should instead charge all relevant government agencies with developing explicit productivity policies – for their own operations, and for the areas of the economy that they influence. For example, the US Department of Agriculture should support a comprehensive program to support agricultural mechanization, with the goal being to mechanize as much agricultural work as possible to reduce the need for low-wage workers. The Department of Housing and Urban Development should take the lead in supporting a productivity strategy for the construction industry. The Department of Education should focus on boosting productivity in education. And so forth.

After that, we need to focus on developing better “tools.” The greatest driver of economic progress since the dawn of the industrial revolution has been the development of tools that either replace or augment workers, creating new industries and new opportunities for people to work in better jobs and have higher incomes. This will be true for the next century as well.

The possibilities are endless: robots that could replace janitors, food servers, and street cleaners; artificial intelligence that could replace knowledge jobs like insurance agents and accountants; autonomous vehicles to replace taxi drivers and truck drivers; better materials could reduce rust, which costs the US economy $400 billion; and biopharmaceutical innovations could cure costly diseases like Alzheimer’s, which research by the Information Technology and Innovation Foundation (ITIF) shows will cost the economy $1 trillion per year by 2050. 

Unfortunately, the United States has not designed its scientific research programs explicitly to advance technologies that drive productivity. Instead, they follow the advice of economists who say governments shouldn’t pick particular technology areas and academic researchers who say “just give us the money and let us decide what to study.”

Moreover, the federal government shies away from productivity-focused R&D for fear of public opposition. This is one reason why the US National Robotics Initiative, run by the National Science Foundation, focuses only on robotic technology that complements, rather than replaces, workers. By limiting their research funding in this way, they will be assured of slowing the development of robotic technologies that can significantly boost productivity. 

It’s time for a national innovation agenda focused on supercharging the development of better tools to drive productivity. The next president should call on Congress to appropriate an additional $10 billion dollars to support federal research and development into areas that would boost productivity, in part by eliminating labor or unneeded economic output.

This should be guided by the development of a national research roadmaps for key automation technologies and the technologies underlying those technologies, such as semiconductors. Even if Congress is unwilling to allocate more funds, existing funding could be targeted more in productivity-enhancing areas.

Finally, we don’t just need better tools; we need firms to adopt them more rapidly.

Unfortunately, US companies have cut back their investments in new equipment and software over the last decade. Not surprisingly, then, the “tools” available to the average US worker are worth less now than they were 15 years ago. The stock of equipment available to workers has fallen from average value of $42,000 in 1995 to around $32,000 in 2014 (in constant 2009 dollars). With less and likely older technology at their disposal, productivity growth has slowed. The next president should insist that any corporate tax reform measure expands investment incentives, either by allowing all investments to be expensed in the first year, or, even better, by creating an investment tax credit. This could be paid for by taxing dividends and capital gains as normal income, rather than at a reduced rate.

If all these policies work and we get annual productivity growth up from 1 percent a year to perhaps 3 percent a year, a loud chorus of techno-skeptics and economic fearmongers allege the end result will be fewer jobs.

So why work for more productivity? The good news is the Chicken Littles are wrong; we don’t need to worry. As ITIF has written, the gains from productivity don’t get buried under a mattress. More productivity means more money for workers and consumers to they spend, which in turn creates the demand to support more jobs. That’s why we had low unemployment in the 1990s, yet high productivity growth.

This doesn’t mean some workers won’t have to find new jobs. But the solution is to do more to help them, not slow the progress of technology innovation and economic growth. Right now, the federal government provides help if you’ve lost your job from trade imports, but not from technology. That needs to change. The next president needs to urge Congress to transform the Trade Adjustment Assistance Act (TAA), into a comprehensive Trade and Technology Adjustment Assistance Act (TTAA), to help all displaced workers, no matter the cause of their displacement.

Regardless of what happens in the business cycle, the next president will likely face a precarious and weak economy, unless he or she decides to buck conventional economic thinking and put in place a national productivity strategy. 

Robert D. Atkinson (@RobAtkinsonITIF) is the founder and president of the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy. 

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.