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US Productivity Growth Is Set to Fall for the First Time in Decades. Should We Worry a Little or a Lot?
From the Financial Times:
Productivity is set to fall in the US for the first time in more than three decades, raising the prospect of persistent wage stagnation and the risk of a further populist backlash. Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year. … “Last year it looked like we were entering into a productivity crisis: now we are right in it,” said Bart van Ark, the Conference Board’s chief economist. “Companies really need to invest seriously in innovation. It is time for companies to move on the productivity agenda to turn this story around.” …
Unless the rate of productivity growth increases, advanced economies will struggle to raise living standards and pay for the costs of their ageing populations. … Output per person, an alternative measure of productivity, grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. … Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006. …
Productivity growth lies at the heart of economic progress. Without an improvement in output for every hour worked, economies can grow only if people work harder and longer or more people find jobs. A downturn in productivity growth in one year does not matter much because economies will go through ups and downs as technology changes, but a persistent decline is a much more serious prospect.
Know what’s worse than middle-class incomes not rising in sync with productivity growth? No productivity growth at all. Without innovation-driven growth, there’s no wealth to redistribute.
Two big questions: First, is the stagnation real? As the FT notes, “The poor productivity numbers are in some ways surprising given the breakneck pace of digital innovation in powerhouses such as Silicon Valley and other US research hubs. However such new technologies are only gradually being rolled out across the economy.”
Maybe we are mismeasuring productivity growth both in terms of a) accurately capturing technological progress in today’s increasingly digital economy and b) the value of free goods such as Facebook and Google Maps that don’t show up in GDP. Some economists, such as those at Goldman Sachs, argue this may be the case. In fact, Team Goldman has created an alternative productivity timeline that incorporates revised measurements. So America’s 2% economy is maybe really closer to a 3% economy:
Second, how worried should we be? Even if the numbers are more or less correct, there are also reasons for hope. More people are working in science than ever before, and with better tools. And we may be just at the start of many new technologies being incorporated more effectively and deeply in the economy. As economist Daron Acemoglu recently said: “It may well be that these innovations haven’t translated into productivity. But if you look at just the technologies that have been [recently] invented and are close to being implemented over the next five to 10 years, they are amazingly rich. It is just very hard to think we’re in an age of paucity of innovation.”
But we shouldn’t assume the productivity slump, if real, will turn around. Again, the FT: “The White House has argued that slowing investment may be dragging productivity down and has highlighted a slump in the number of business start-ups.” (Though there is some good news of late on high-impact, entrepreneurial innovation.) Those would seem to be two areas, along with more basic science research, that policymakers should focus on to achieve greater product innovation. Also, housing — both in terms of affordability in our high productivity cities and making it easier for workers to move to where the good jobs are. Oh, and maybe we need a big inspirational goal, too.
Anyway, productivity stories often start with this famous Paul Krugman quote, so mine will end with it: “Productivity isn’t everything, but in the long run it is almost everything.”
Published in Economics
Google Maps may be convenient, but the idea that it significantly increases productivity is absurd. The contribution of Google Maps to productivity is probably about the value of one good mapbook per consumer. So, not very much.
This is a fairly predictable consequence of eight years of slack labor markets and economic despair. The innovation the small business or franchise owner does to meet payroll in a tight labor market is far, far more valuable than all the idiot tech companies in Silicon Valley put together. Just look at what Wendys is doing.
But… #Recovery!!!
Falling wages? No problem. Just increase the minimum wage. A progressive solution.
What happened 2016? Oh, yeah Obamacare finally arrived in its full mandatory glory.
Probably a coincidence. That’s it. Coincidence.
Seawriter
Google Maps routinely helps me to avoid traffic delays of 15 minutes or more. If it allows me one hour a week of additional billable time at $150 an hour, that’s a value of ~$8,100 a year for my company.
Productivity increases are due in part to capital investment to leverage up workers. When regime risk increases, capital investment does what?
(must resist talking about asset loss and giving away domestic markets…it might upset people …must resist…)
Sorry but Productivity is impossible to measure on the whole for the economy by anyone. One can only measure productivity for a firm that only makes one product that have been fairly homogeneous over the years. Everything else when it comes to productivity just depends how you allocate cost over the different products.
Productivity number are just rough approximates that have a huge error rate to them that could approach 100% or more. In the end each person has their own idea of how each product improves their productivity.
No no no…. mass importation of foreign workers. Especially for skilled jobs. THAT’S the ticket!
It is hard to be productive when so much effort and mental energy is expended just trying to adhere to ever-growing regulations.
Or perhaps all the technology innovation is causing the decline in productivity? How many work-hours are lost to Facebook? To smartphone surfing? I know fantasy football has an impact.
There’s also this conservative conversation and community website that’s really hurting my productivity…
^This. This is the whole ball game. Maybe after the populist hordes have unleashed their anger on every other institution in America they will finally figure out the real problem and get behind doing something to address it.
If not, we will wind up with everyone working for the government, being “compensated” with promises of lavish pensions that can never be paid. In other words, we will be Greece without the quaint beaches.
Should we be worried? No, these data tell even slow learning Democrats and a lot of economists who can’t learn, that we are strangling entrepreneur activity and imposing the dead hand of government in all its perverse forms onto existing business activity. Perhaps progressives see the new little guys as Kulaks, but the rest of us should take notice. This can be turned around amazingly fast.
Back in 2011, while facing layoff when the Shuttle program ended, two others and I put together a plan to start a technical writing company. We were all getting a big payout from Boeing when we got laid off (56 weeks pay for me – more for the others), so we had enough capital for the first two years. We developed a business plan – and were going to employ four others initially.
We finally decided not to start the business, deciding the regulatory climate would probably strangle us, the short to mid-term rewards were unlikely to be much higher than simply investing the money, against the risk of our entire investment.
Within a month of being laid-off we were all employed at salaries equal to or higher than our Boeing salaries. The four we had planned to hire did not find work for six months to a year.
I got caught in the energy downturn four years later, but lived pretty well during those years. I am now working at a startup – in large part because it beats doing nothing, and the risk-reward ratio is the reverse of what it was in 2011. Better opportunity – and that payout I retained provides my financial cushion.
Seawriter
Too many policies lead to this – The (not so) Affordable Care Act, heavy regulations on industry, too many new government jobs, stifling of the energy sector – this administration has not been job-friendly – they encouraged dependency and whining. This is also part of the frustration that lead to a political implosion on both sides of the aisle. We have all the resources for innovation, the brains to create, the muscle to produce – we should not be in this state.
What happens when Trump doesn’t give all those angry white guys their manufacturing jobs back? Then the real rioting begins!
That is the only reason I can think of to vote for Trump.
Productivity, and economic growth, are driven by technology, but restrained by regulation. Uber contributes little productivity in those jurisdictions which ban it. Economist Mancur Olsen argues, it seems to me convincingly, that the longer a stable society exists, the more masses of rent seekers accumulate, and block progress (see his Rise and Decline of Nations, in particular). The only way we’ve found to off-load the institutions created by rent seekers, from local occupational licensing boards all the way up to the EPA and the Export/Import Bank, is to have a French Revolution size shake-up.
Most folks assume that a President Trump would be a big shake-up. The question is, would he be big enough?
Many technology efforts that should theoretically improve productivity actually don’t…and in some cases actually harm it…due to either poor system design by the vendor, or clueless implementation by the company implementing it. See the Target Canada debacle for an example that probably includes elements of both factors:
http://chicagoboyz.net/archives/51968.html
Technology aside, there is also a huge amount of productivity lost as a result of poorly-thought-out acquisitions. “Synergies” are highlighted when the BizDev guys and the investment bankers are pushing the deal; the *negative* synergies are rarely considered.
Huge productivity losses as a result of excessive regulation, as other comments have pointed out; also, runaway credentialism often puts Ivy League graduates and advanced degree holders in positions (sometimes in business, but even more so in government and in ‘nonprofits’) for which they are really not very qualified.
Two things:
It isn’t bad enough that the phonied up phony government statistics still aren’t phony enough to make things look sufficiently rosy.
Nope. The minions of the infamous vampire squid have to phony things up even more, to make the present regime look successful, somehow.
I’m not buying it. If things were really rosy, the government and its friends wouldn’t need to continuously figure out new ways to calculate economic statistics, because the shine would show up in the methodology they already use.
But it doesn’t, hence the new methodology.
And, also, hence Trump.
Yep, if you keep putting fingers in the dyke, but the dyke keeps leaking, the obvious answer is to take a sledge hammer to the dyke. That oughta do it.
Well, at least you will get a different result.
There is no dyke.
There is just sad collection of fools who keep telling us to ignore to rising water that is washing the United States and American culture out to sea, because it hasn’t affected them. Yet.
I’m done with that.