Why the US needs a new, tech-driven growth strategy

Government policies shouldn't shy away from investments in technological innovation, new equipment, labor skills, and infrastructure in order to increase productivity.

The most important measure of long-term economic growth is the rate at which we increase productivity, because that is what drives long-term wage growth. Yet by this metric, the prospects for resurgent growth in the US economy are bleak. In fact, the average annual growth rate in labor productivity since the Great Recession has been half the rate that the country achieved in the first two-and-a-half decades after World War II, when the US was the dominant technology-based economy. Not surprisingly, wage growth in recent years has been close to nonexistent.

Even worse is the fact that prospects for addressing our national productivity problem also are bleak, and they will remain so as long as politicians of both political parties are largely uninformed about or uncommitted to productivity-oriented economic growth strategies. Instead, Republicans’ favorite growth policies are based on lower taxes, less government spending, and limited regulation, the idea being that the private sector is the single entity capable of generating economic growth. Meanwhile, many Democrats ignore growth altogether, focusing instead on redistributing income from the highest income levels to the middle class through tax and spending adjustments. All of this leads to fights over how to divide up a stagnant income “pie.”

Neither philosophy addresses the fundamental problem of productivity stagnation. What the country most needs is to adopt a new, technology-driven growth strategy that supports investments in four major categories of assets that drive productivity growth: technological innovation, new equipment and machinery, labor skills, and infrastructure.

First, one economic study after another has shown that new technology is the long-term driver of productivity growth. Thus, any economy that wants sustained increases in income for its workers must make substantial investments in research and development. However, only after new technologies have been advanced to at least a proof-of-concept stage will most companies invest the substantial funds in the applied R&D required to produce market-ready products and services. That is why nearly every technology driving the US economy today had its origins in government funding. And that is why it has been self-defeating in the last decade for fiscal belt-tightening measures to slash federal funding for R&D by 9 percent in real terms. A sensible growth strategy would reverse that course.

Second, once developed, technologies must be introduced into the marketplace to achieve productivity impacts. Doing so requires business investment in hardware and software, which embodies the new technologies. However, corporations have focused more on returning earnings to shareholders through stock buy backs and increased dividend payments than expanding investment in new productivity tools. “Fixed private investment” was extremely low in the 2000’s and has only rebounded modestly in this decade. The solution is corporate tax reform that encourages more investment and less profit-taking.

Third, technologically advanced production assets are of little use without skilled labor. Whereas universities and community colleges – with some modest support from the Department of Labor – have begun to adjust curricula, American workers still lack the requisite skills for the rapidly changing technology-based global economy. American students continue to under-perform those in other countries, and multiple surveys of corporate managers find substantial concern about current and future availability of workers prepared for the jobs of the future. So a properly tailored economic growth strategy must include a much stronger commitment to improving technical skills.

The fourth and final investment category is infrastructure. The United States has significantly under-invested in surface transportation infrastructure, which economists have long estimated is reducing economic growth. But now, we are facing the additional problem that modern industries also require “technical” infrastructure (joint government-industry-university research facilities, standardized scientific and engineering data, measurement and testing standards, product testing facilities, product acceptance standards, etc.). Such infrastructure is essential for the economy of the future, including increasing digital content for major revolutions such as the Internet of Things.

But rather than invest in the fundamentals necessary for productivity growth, US policymakers have largely treated our economic malaise as if it were a business cycle problem. The consequent use of historically huge monetary stimulus – in the form of $4.5 trillion in Federal Reserve Bank assets in 2015, five times the level in 2008 – has drastically lowered interest rates and but has done nothing to raise incomes. The other go-to macroeconomic tool, fiscal policy, has focused on increased entitlement spending while actually cutting federal investment in the assets necessary to boost productivity and wages.

Most frustrating is the fact that America does not seem capable of having an intelligent conversation about productivity growth and its sources. Presidential candidates blame Mexico for illegal immigrants and American companies for offshoring jobs to access cheaper labor, lower taxes, and subsidies for R&D. At the same time, most conventional economists still cling to the view that government policy can do little or nothing to affect productivity. A growing share of pundits and policy elites have bought into the inaccurate fear that increasing productivity through automation will eliminate jobs, so they resist policies that support tech-based productivity growth.

The 2016 presidential campaign is now mired in its traditional silly season. When the time comes for more serious debate about credible policy solutions, long-term investments in the underpinnings of a more productive economy should be front and center.

Gregory Tassey is a research fellow at the University of Washington’s Economic Policy Research Center.