The Great Productivity Slowdown

from The Wall Street Journal,

It began long before the financial crisis, and it has worsened markedly in the past six years.

Equity markets have hit multiyear highs and consumer sentiment is buoyant. Yet economic productivity remains lackluster. The Labor Department announced Thursday that worker productivity fell 0.6% since January, a much bigger drop than expected. This is neither a statistical illusion nor a hangover from the Great Recession. The productivity slowdown began long before the financial crisis, and it has worsened markedly in the past six years. The drop-off extends to wholesale and retail trade, manufacturing, construction, utilities and a host of private and public services. Industries that consume and produce information technology and communications are not immune to the slowdown.

From 1950 to 1970, U.S. productivity grew on average by 2.6% annually. From 1970 to 1990 it fell to 1.5%. The information technology boom of the ’90s interrupted the slide, but since 2010 U.S. productivity growth has been in free fall. It is now roughly 0.6% a year. No wonder Federal Reserve Chair Janet Yellen recently called low productivity a “significant problem.” Various estimates suggest that had U.S. productivity growth not slowed, GDP would be about $3 trillion higher than it is today. How is this happening during a technological revolution? Some think the data are wrong.

Gross domestic product also does not fully capture metrics like time saved from shopping online. Nor does it include the value of leisure and the well-being that technology provides its users. Many economists contend that properly counting free digital services from companies like Google and Facebook would substantially boost productivity and GDP growth.

On the other hand, recent studies by Brookings, the Organization for Economic Cooperation and Development and the Bureau of Economic Analysis claim that so-called free services are actually accounted for in GDP through the money spent by firms on internet ads.

Debates about the shortcomings of official data can be useful. But pinning the productivity slowdown on a statistical deficiency ignores other factors. In his 2016 book, “The Rise and Fall of American Growth,” Northwestern University economist Robert Gordon contends that the current economy fails to measure up to the great inventions of the past, and that innovation today is more incremental than transformative. He has argued vigorously that the transformative effects of technologies like electric lighting, indoor plumbing, elevators, autos, air travel and television are unlikely to be repeated. Technological innovation, he argues, will not be sufficiently robust to counter the headwinds of slowing population growth, rising inequality and exploding sovereign debt.

The growth dividends from disruptive technology often require time before they are widely diffused and used. To Mr. Gordon’s point, economic historians respond that the Industrial Revolution did not improve British living standards for almost a century. Likewise the productivity boost spurred by the transformative innovations of the early 20th century took decades to kick in.

It’s possible that economic dynamism and entrepreneurship are no longer driving the U.S. economy. Startups are being created at a slower pace. From 1996 to 2007 the ratio of new firms to the total number of firms oscillated between 9.6 and 11.2. Today it has dropped to 7.8. Existing firms do innovate and contribute to improved productivity, but the declining share of young firms suggests a less dynamic economy.

The U.S. economy is reaping some of the deleterious effects sowed by decades of weak capital spending. Since the 1970s, the compound annual growth in nonresidential fixed investment has plummeted from 12% to 3.3%.

The real debate is about policies that favor productivity and GDP growth. Predicting future innovation is hazardous, but deregulation and streamlined licensing requirements will facilitate job mobility. Tax reform that encourages and rewards investment should stimulate capital investment. Some form of fiscal stimulus and diverse infrastructure spending should buoy demand and efficiency. Leveraging technology to improve education and job training will help match skills and jobs across the economy. Last but not least, entitlement reform must be on the policy agenda. These necessary policy changes provide options for improving productivity and GDP growth. Waiting for the data debate to resolve itself gets us nowhere.

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