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The American Growth Machine is badly malfunctioning, at least as diagnosed by official government statistics. US productivity growth — the engine of long-term economic growth — has averaged just 0.5% since 2010 vs. 2.3% over the previous six decades. Productivity growth in 2016 fell to 0.2%, notes IHS Markit, the ninth weakest reading in the postwar era. (And that’s post World War II, not post-Iraq War.) Moreover, when stalled productivity growth meets slowing labor force growth, you get an economy capable only of uninspiring 1-2% growth at best. And growth that slow, especially when combined with greater income inequality, may feel like no growth at all to most Americans. The Great Stagnation.
All terrible news, unless of course the official numbers are wrong. Some economists think current statistical methods badly understate the value of new products, especially in the tech economy, and miss welfare gains from free goods like Facebook and Wikipedia. If they are right, overall economic growth and living standards are growing faster than we think. Then again, some economists think the official numbers are capturing a real downshift. The technopessimists argue today’s innovations aren’t as transformative as past ones. Combustion engine beats smartphone.
Count Goldman Sachs as a techno-optimist, more or less. The bank’s economists think there is a legit mismeasurement problem, especially because of the digital economy. But that issue can’t explain the entire productivity shortfall, maybe just a quarter to a half percentage point. Why not more? Are they not paying attention to what’s been happening in Silicon Valley? But the story of the dynamic US tech sector actually undercuts the mismeasurement story somewhat, according to Goldman. The productivity slowdown is global in nature, even in countries where tech isn’t as important.
OK, so even if you factor in mismeasurment, productivity today is pretty weak. But a new Goldman report suggests some reason for further optimism:
However, there are also good reasons to attribute some of the weakness to a long-lasting but ultimately temporary “hangover” from the financial crisis and great recession. First, a decomposition of productivity into its underlying drivers in advanced economies suggests that most of the weakness has been due to a reduced contribution from capital deepening, as opposed to a slowdown in “pure” technical progress. Statistically, we can break labor productivity growth into three categories: the contribution from labor quality (education and experience level of workers), the contribution from capital intensity (the amount of capital per worker), and total factor productivity (productivity growth that cannot be accounted for with identifiable inputs). Exhibit 3 shows that the lion’s share of the productivity slowdown is due to a lower contribution from capital deepening, at least in the US, Japan, and the UK.
The good news here is that capital intensity — the dark blue bits in the above chart — is related to capital spending, and Goldman thinks recent data — including its own in-house trackers — suggest business investment is ready to accelerate as the global financial crisis and recession hangover continues to fade. Bottom line: “We look for a longer-term pickup in measured productivity growth to 1½% in the US and close to 1% in the Euro area.”
Much better, but still room for better policy — tax, regulation, education, public investment — to boost productivity growth, including the total factor productivity, the portion of productivity that attempts to measure technical progress or innovation.Published in