Contributor Post Created with Sketch. America’s Chronic Productivity Problem Returns, at Least for Now

 

The American economy hasn’t generated decent productivity growth since 2005 (not counting the Financial Crisis-skewed years of 2009 and 2010). Indeed, if you’re going to talk about how American capitalism is “broken” or dysfunctional, you should really lead with productivity rather than the “problem” of having too many super-entrepreneur billionaires. If living standards are going to rise anywhere near as fast in the future as in the past, greater innovation-driven productivity growth will be indispensable.

So it was really encouraging to see sharply faster productivity growth in the first half of 2019, 3.5 percent annualized in Q1 and 2.5 percent in Q2. Also encouraging: multifactor productivity — the part of productivity growth accounted for by technological progress rather than better-trained workers or more buildings and software — rose by 1.0 percent in 2018, the strongest gain since the current expansion began in 2010.

Even taking into account the volatility of productivity numbers, today’s Q3 report was a bit of a downer, declining 0.3 percent and reducing the advance over the past year to 1.4 percent. It was the first drop in four years. As The Wall Street Journal points out, that performance is in keeping “with the tepid pace in the 15 years since 2004. In the 15 years prior to that, productivity growth averaged 2.5%.” JPMorgan see the underlying trend in productivity as “soft.”

And this analysis from Capital Economics:

The 0.3% annualised decline in non-farm productivity in the third quarter left the annual growth rate at 1.4%, still slightly above the previous five-year average, but it illustrates that the acceleration in productivity growth that began last year is already fading. That isn’t a huge surprise given the recent weakness of business investment, with declines in both the second and third quarters meaning that the earlier wave of capital deepening has now gone into reverse. Weak investment can in turn partly be blamed on trade uncertainty, in which case we could see a rebound if a deal with China is eventually agreed. But it also reflects the fact that weaker demand is contributing to the re-emergence of spare capacity, reducing the need for firms to invest.

Now 1.4 percent productivity growth ain’t nothing. But when combined with slight overall labor force growth, you’re talking about a Two Percent Economy, in terms of overall economic growth. What is to be done? Ending the trade war would be a good start. Beyond that, how about the best economic policies for innovation, as ranked by economists:

Published in Economics
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There are 21 comments.

  1. Misthiocracy grudgingly Member

    James Pethokoukis: If living standards are going to rise anywhere near as fast in the future as in the past, greater innovation-driven productivity growth will be indispensable.

    < devil’s advocate mode = on >

    Living standards in the United States are pretty darned good, on average. Do they really need to rise as quickly as they did in the 20th Century, when technological innovation made everyday life consistently easier for virtually every individual regardless of where they were located on the socio-economic ladder? 

    Obviously, it’s really hard to predict which new technologies are coming down the pike, but from where I’m standing most of predictions for the time being don’t seem to be aimed at significantly improving the lives of everyday people but rather are aimed at increasing the capacity of existing technologies (faster computers, faster networks, faster mass transit, improved electricity generation, etc.).

    As such, can overall living standards (a fairly abstract concept) really grow much more for everyday people? What if the real challenge is merely to maintain current living standards against the pressures of population growth and the need to care for the fast-growing cohort of elderly folk? 

    In other words, how much productivity growth is necessary simply to keep things as good as they currently are?

    • #1
    • November 6, 2019, at 2:51 PM PST
    • 5 likes
  2. Mike H Coolidge

    If we want any chance to have real GDP growth well above 1.5% going forward, we need higher levels of immigration. The only reason we are above that level now is because the employment rate has been rising, but that can’t happen forever. We need more people to sustain growth. Also we need the government to remove regulations. That’s what keeping down productivity.

     

    • #2
    • November 6, 2019, at 3:40 PM PST
    • Like
  3. Mark Camp Member

    James Pethokoukis:

    What is to be done? Ending the trade war would be a good start. Beyond that, how about the best economic policies for innovation, as ranked by economists:

    No, as not as ranked by economists. As ranked by interventionists. Since a century ago, no interventionist can be regarded as a serious economist. 

    It is extremely disappointing to see that, after a making a quick post promoting economic freedom today, Mr. Pethokoukis has returned to his full-time job as an merchandiser for the cruise industry that sells trips on the scenic route to socialism.

    • #3
    • November 6, 2019, at 5:08 PM PST
    • 3 likes
  4. DonG Coolidge

    James Pethokoukis:

    I am skeptical about the Universities. I bet this was true a generation or two ago, but Universities are sooo expensive and crank out sooo many people with useless degrees. The idea that everyone should go to college probably means that many people are spending a lot of time and money for something that is not getting them practical skills. Malinvestment. Annual spending is $600B and cutting that in half is probably a good start.

     

    It looks like average hours work dipped a bit in Q3. Maybe that is related to the GM strike. 

    United States Average Weekly Hours

    • #4
    • November 6, 2019, at 6:30 PM PST
    • 1 like
  5. David Foster Member

    A discussion of possible reasons why productivity growth is lower than one might expect, given technological improvements and investments, here: Are Those Robots Slacking Off on the Job?

    • #5
    • November 7, 2019, at 4:03 AM PST
    • Like
  6. I Walton Member

    Mike H (View Comment):

    If we want any chance to have real GDP growth well above 1.5% going forward, we need higher levels of immigration. The only reason we are above that level now is because the employment rate has been rising, but that can’t happen forever. We need more people to sustain growth. Also we need the government to remove regulations. That’s what keeping down productivity.

     

    Adding immigrants doesn’t raise productivity it raises output. Who immigrates matters more than numbers. We used to get different sorts. Now we get those who can walk here, mostly semi literate or illiterate indigenous Americans who work hard, their relatives who don’t and criminals. We must get on top of immigration, and like you say continue to deregulate, removing the regulatory bureaucracy and where it plays a role moving it to the states.

    • #6
    • November 7, 2019, at 4:24 AM PST
    • Like
  7. Old Bathos Member

    I think we need a deeper dive into the issue of productivity as shown by my painstakingly assembled data in the chart provided. The real mystery is not why productivity growth has slowed but why it is not a negative number.

    • #7
    • November 7, 2019, at 5:45 AM PST
    • 5 likes
  8. Mark Camp Member

    Old Bathos (View Comment):

    I think we need a deeper dive into the issue of productivity as shown by my painstakingly assembled data in the chart provided. The real mystery is not why productivity growth has slowed but why it is not a negative number.

     

     

     

     

     

     

     

     

    Hoo boy!

    This is a beauty, OB.

    • #8
    • November 7, 2019, at 6:05 AM PST
    • 1 like
  9. James Gawron Thatcher

    Old Bathos (View Comment):

    I think we need a deeper dive into the issue of productivity as shown by my painstakingly assembled data in the chart provided. The real mystery is not why productivity growth has slowed but why it is not a negative number.

     

     

     

     

     

     

     

     

    OldB,

    I think your analysis is right on. However, we must add a purely cultural factor to the equation. Once you have an elite class with power and prestige whose motto is “facts don’t matter only the narrative matters” then it is highly unlikely that this culture will be able to recognize anything that is truly productive. This hopelessly lunatic culture can’t tell a useful product from a trendy gimmick.

    Whether it’s a 10-year-old listening to bad rap music at school on his $1,000 smartphone or it’s Elon Musk making a self-driving car that kills people, our total lack of rational critical faculties must be destroying most of what would be huge productivity gains. The good news is that all it would take to correct this would be a conscious recognition that we have a problem and a commitment to do better. The bad news is that zombie wokeness has embedded itself in the schools, the media, and the government. Greta Thunberg is mindlessly pushing society to heights of ignorant absurdity with Soros’ near-unlimited funding behind her.

    Actually, given the level of concentrated idiocy loose in society, it is amazing that we continue to see the productivity growth we see. Gd bless the USA.

    Regards,

    Jim

     

    • #9
    • November 7, 2019, at 7:24 AM PST
    • Like
  10. Mark Camp Member

    James Gawron (View Comment):
    Whether it’s a 10-year-old listening to bad rap music at school on his $1,000 smartphone or it’s Elon Musk making a self-driving car that kills people, our total lack of rational critical faculties must be destroying most of what would be huge productivity gains. The good news is that all it would take to correct this would be a conscious recognition that we have a problem and a commitment to do better.

    [Emphasis added]

    In fact, we have two problems here:

    • problems of social values, like kids’ development being harmed by destructive smartphone use
    • economic problems, like low productivity growth

    To solve a problem requires identifying it, which means correctly distinguishing between different problems.

    I’m not sure, but it seems that you have conflated an objective economic fact–low productivity growth–with a fact about good or bad social behavior.

     

     

     

    • #10
    • November 7, 2019, at 7:58 AM PST
    • Like
  11. Old Bathos Member

    I assume, rightly or wrongly, that productivity is closely linked to innovation.

    Innovation disrupts guilds, trusts and other price conspiracies.

    If the established order (ruling classes, craft guilds, owners of closed markets) can squelch innovation, it will.

    Complex rules and high incomes and high status for those who implement them can be seen as a society siding with the guilds rather than the disruptors.

    A culture that recoils from risk, rewards academic conformity and compliance and succumbs to the temptation of a centrally planned nirvana is doomed.

    • #11
    • November 7, 2019, at 8:49 AM PST
    • 3 likes
  12. WillowSpring Member

    Old Bathos (View Comment):
    I think we need a deeper dive into the issue of productivity as shown by my painstakingly assembled data in the chart provided. The real mystery is not why productivity growth has slowed but why it is not a negative number.

    I heard a news report the other day about working less could increase productivity. It was based on a study by Microsoft in Japan where several thousand workers were allowed to work 4 days a week and their ‘productivity’ (measured by sales) went up.

    Toward the end of the report, they said that the workers were also encouraged to have less meetings and to hold them to 30 minutes or less.

    I am not sure how reliable sales is as a general measure of productivity, but I would bet that the real increase is due to less/shorter meetings.

    • #12
    • November 7, 2019, at 9:07 AM PST
    • Like
  13. ctlaw Coolidge

    If “skilled immigration” helps us, then “unskilled immigration” hurts us. Build the wall!

    • #13
    • November 7, 2019, at 9:28 AM PST
    • 1 like
  14. lowtech redneck Coolidge

    Mike H (View Comment):

    If we want any chance to have real GDP growth well above 1.5% going forward, we need higher levels of immigration. 

     

    Get back to us when you figure out how to stop their children from voting for anti-American, neo-Marxist Democrats.

    • #14
    • November 7, 2019, at 10:16 AM PST
    • Like
  15. Manny Member

    Old Bathos (View Comment):

    I assume, rightly or wrongly, that productivity is closely linked to innovation.

     

    Exactly my thought. It sounds like we’ve squeezed out all the productivity out of the computer innovations that is possible. Without some new way of reducing labor, everything is just tinkering on the margins.

    Out of curiosity, how do we compare with other modern economies over this time span? Are we behind?

    • #15
    • November 7, 2019, at 11:30 AM PST
    • Like
  16. Manny Member

    WillowSpring (View Comment):

    Old Bathos (View Comment):
    I think we need a deeper dive into the issue of productivity as shown by my painstakingly assembled data in the chart provided. The real mystery is not why productivity growth has slowed but why it is not a negative number.

    I heard a news report the other day about working less could increase productivity. It was based on a study by Microsoft in Japan where several thousand workers were allowed to work 4 days a week and their ‘productivity’ (measured by sales) went up.

    Toward the end of the report, they said that the workers were also encouraged to have less meetings and to hold them to 30 minutes or less.

    I am not sure how reliable sales is as a general measure of productivity, but I would bet that the real increase is due to less/shorter meetings.

    It sounds like productivity might go up but overall production might go down.

    • #16
    • November 7, 2019, at 11:31 AM PST
    • Like
  17. Manny Member

    Misthiocracy grudgingly (View Comment):
    Misthiocracy grudgingly

    James Pethokoukis: If living standards are going to rise anywhere near as fast in the future as in the past, greater innovation-driven productivity growth will be indispensable.

    < devil’s advocate mode = on >

    Living standards in the United States are pretty darned good, on average. Do they really need to rise as quickly as they did in the 20th Century, when technological innovation made everyday life consistently easier for virtually every individual regardless of where they were located on the socio-economic ladder? 

    Excellent point. Is there a point of diminishing returns? If the overwhelming mass of the population in the country are happy with their living standard, then does that squelch the necessity of productivity gains, and necessity is the mother of invention? I don’t have the answers. Just interesting questions.

    • #17
    • November 7, 2019, at 11:35 AM PST
    • Like
  18. David Foster Member

    Manny (View Comment):
    It sounds like we’ve squeezed out all the productivity out of the computer innovations that is possible.

    I don’t think this is true at all. The productivity impact isn’t just a function of the technology per se, it is also a function of how it is *applied* to particular business problems. And a lot of implementations are poor to awful to positively productivity-harmful.

    • #18
    • November 7, 2019, at 1:39 PM PST
    • Like
  19. Fake John/Jane Galt Coolidge

    DonG (View Comment):

    James Pethokoukis:

    I am skeptical about the Universities. I bet this was true a generation or two ago, but Universities are sooo expensive and crank out sooo many people with useless degrees. The idea that everyone should go to college probably means that many people are spending a lot of time and money for something that is not getting them practical skills. Malinvestment. Annual spending is $600B and cutting that in half is probably a good start.

     

    It looks like average hours work dipped a bit in Q3. Maybe that is related to the GM strike.

    United States Average Weekly Hours

    Can’t really call it not a practical skill. Many companies will not interview you unless you have a Bachelors or Masters. I know people that got their Masters so they could get in the 50k

    • #19
    • November 7, 2019, at 5:03 PM PST
    • Like
  20. DonG Coolidge

    James Gawron (View Comment):

    This hopelessly lunatic culture can’t tell a useful product from a trendy gimmick.

    Whether it’s a 10-year-old listening to bad rap music at school on his $1,000 smartphone or it’s Elon Musk making a self-driving car that kills people, our total lack of rational critical faculties must be destroying most of what would be huge productivity gains.

    Smartphones are amazing. If you could have a smartphone and all the music streaming and google connected information, it would be worth $100K. If you could take that back in time 20 years, Bill Gates would pay you $1B. Smartphones are changing the whole world, from Wall St. traders to African villagers, and they start at $100. 

    That self-driving car might kill people, but at 1/5th the rate of humans, which would be the greatest single advancement ever in driver safety. Not to mention the billion of hours of time it would return to drivers and the increased utilization of a billion cars that are parked 95% of the time. 

     

    • #20
    • November 7, 2019, at 5:40 PM PST
    • 1 like
  21. Mark Camp Member

    Old Bathos (View Comment):

    I assume, rightly or wrongly, that productivity is closely linked to innovation.

    Innovation disrupts guilds, trusts and other price conspiracies.

    If the established order (ruling classes, craft guilds, owners of closed markets) can squelch innovation, it will.

    Complex rules and high incomes and high status for those who implement them can be seen as a society siding with the guilds rather than the disruptors.

    A culture that recoils from risk, rewards academic conformity and compliance and succumbs to the temptation of a centrally planned nirvana is doomed.

    The first four assertions are undoubtedly correct. The fifth is a prediction of certain doom, rather than mere relative failure. Were it the latter it would also be undoubtedly correct. Anyway, I think it’s also probably correct.

    • #21
    • November 7, 2019, at 8:14 PM PST
    • 1 like