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10:34, August 11, 2016
Economic recovery in the United States after the financial crisis has entailed considerablepain. Although the growth of the economy never really regained momentum after thefinancial crisis, the modest expansion has led to a consensus that things are back to normal.The U.S. economy may soon receive a “stamp of approval” from the Federal Reserve –when the central bank raises interest rates, it will show its confidence that American firmsare finally meeting their potential.
But even if much of the economy has healed, a more skeptical narrative is emerging. Latestdata suggest that the U.S. economy is less productive now than it was last year. Has thelast recession drained the innovative spirit of American companies? If the dynamism forpast decades is really lost, economic and social consequences could be severe.
Productivity growth means that workers are able to produce more goods and services.Overall, economic performance hinges on capital (tools, buildings, and machines), the totalnumber of hours worked by employees (as well as their skills), and the availabletechnology. When we speak of innovation and productivity growth, we mean thatemployees generate more output even if their skills have remained the same. (The factthat the U.S. needs to improve its education system is a separate issue.)
The “productivity puzzle” is that, according to official statistics, workers are not becomingmore productive, despite ongoing research and introduction of new technologies. A popularexplanation of this mystery is that recent technological innovations either do not makeworkers more efficient, or they contribute to higher productivity in ways that are difficultto measure. The question is whether innovations can be incorporated in the productionprocess. Given that many of the new digital services allow people to enjoy leisure activitiesmore cheaply, the answer is far from obvious.
When communication technologies improve, it is easier to share photographs, streammovies, and connect with other people through social media. But as various types oftransactions become smoother thanks to faster data flows, they do not necessarilytranslate into higher output. It is even possible to imagine that workers in some sectorsproduce less than they used to because work-related tasks are interrupted by incessantemails.
Alternatively, it is conceivable that the quality of services has improved, but theseadvances are not appropriately reflected in prices. That would mean that productivity isunderestimated. If suppliers can build better relationships with their clients thanks tocheap mobile phones or cloud services, then the satisfaction created from betterpartnerships is not measured in official statistics (unless the supplier chooses to raiseprices).
Besides, some companies and people are even providing services at no charge. Many on-line tools and website do not charge their customers, relying on advertising or datacollection for revenues instead. An optimistic observer would note that innovation is not asslow as it looks, because many things that we value are simply not captured by the officialstatistics, due to their “lack of a price tag.”
And yet, a pessimistic analyst could counter the sanguine story with several admonitorypoints. Since 2001, the average growth of the U.S. economy was less than 2% per year,after adjusting for inflation. The job market has been unsatisfactory for years. Many peoplebecame so discouraged in the process of their search for jobs that they dropped out of thelabor force completely. When they stopped looking for jobs, they are no longer counted as“unemployed”. Therefore, the official unemployment rate masks and underestimates thetotal number of people who want to work but are unable to find employment.
The state of the labor market, as well as the lackluster productivity trends, suggest thatthe rate of economic progress has slowed down. But smart public policy could reverse theseunenviable tendencies. Various growth-enhancing reforms are, in principle, available.
Policy makers could raise the odds of an economic revival by enacting tax reform, investingin infrastructure, overhauling the immigration system, or carrying out an ambitious tradepolicy. There was some encouraging news last year when the research and developmenttax credit was made permanent, but research could be supported further by moregenerous grants, for example for medical breakthroughs.
Moreover, the U.S. has neglected the maintenance of both its physical and digitalinfrastructure. A recent assessment from the International Monetary Fund warned thatdata infrastructure in the U.S. still contains too many blind spots, arguing that “thecomprehensive information needed to fully assess and understand financial stability risks”is lacking. These issues are directly connected to productivity, because roads that are notmaintained impede travel and trade. It should also be clear that countries waste valuableresources when they rush to do emergency repairs due to insufficient maintenance ofproductive assets.
Finally, there is ample room to mend a variety of aspects of governance. It would be usefulif political representatives refrained from creating periods of fiscal uncertainty by delayingbudgets and appropriation bills. Multiple worthy reforms have been thwarted by politicalgridlock in recent years. While sensible and predictable public policy is desirable regardlessof the current state of the business cycle, good governance would be particularly valuabletoday, so that people’s creativity can be channeled into greater productivity and newinventions.
The author is a research analysts at the Peterson Institute for International Economics,based in Washington, D.C.
Economic recovery in the United States after the financial crisis has entailed considerablepain. Although the growth of the economy never really regained momentum after thefinancial crisis, the modest expansion has led to a consensus that things are back to normal.The U.S. economy may soon receive a “stamp of approval” from the Federal Reserve –when the central bank raises interest rates, it will show its confidence that American firmsare finally meeting their potential.
But even if much of the economy has healed, a more skeptical narrative is emerging. Latestdata suggest that the U.S. economy is less productive now than it was last year. Has thelast recession drained the innovative spirit of American companies? If the dynamism forpast decades is really lost, economic and social consequences could be severe.
Productivity growth means that workers are able to produce more goods and services.Overall, economic performance hinges on capital (tools, buildings, and machines), the totalnumber of hours worked by employees (as well as their skills), and the availabletechnology. When we speak of innovation and productivity growth, we mean thatemployees generate more output even if their skills have remained the same. (The factthat the U.S. needs to improve its education system is a separate issue.)
The “productivity puzzle” is that, according to official statistics, workers are not becomingmore productive, despite ongoing research and introduction of new technologies. A popularexplanation of this mystery is that recent technological innovations either do not makeworkers more efficient, or they contribute to higher productivity in ways that are difficultto measure. The question is whether innovations can be incorporated in the productionprocess. Given that many of the new digital services allow people to enjoy leisure activitiesmore cheaply, the answer is far from obvious.
When communication technologies improve, it is easier to share photographs, streammovies, and connect with other people through social media. But as various types oftransactions become smoother thanks to faster data flows, they do not necessarilytranslate into higher output. It is even possible to imagine that workers in some sectorsproduce less than they used to because work-related tasks are interrupted by incessantemails.
Alternatively, it is conceivable that the quality of services has improved, but theseadvances are not appropriately reflected in prices. That would mean that productivity isunderestimated. If suppliers can build better relationships with their clients thanks tocheap mobile phones or cloud services, then the satisfaction created from betterpartnerships is not measured in official statistics (unless the supplier chooses to raiseprices).
Besides, some companies and people are even providing services at no charge. Many on-line tools and website do not charge their customers, relying on advertising or datacollection for revenues instead. An optimistic observer would note that innovation is not asslow as it looks, because many things that we value are simply not captured by the officialstatistics, due to their “lack of a price tag.”
And yet, a pessimistic analyst could counter the sanguine story with several admonitorypoints. Since 2001, the average growth of the U.S. economy was less than 2% per year,after adjusting for inflation. The job market has been unsatisfactory for years. Many peoplebecame so discouraged in the process of their search for jobs that they dropped out of thelabor force completely. When they stopped looking for jobs, they are no longer counted as“unemployed”. Therefore, the official unemployment rate masks and underestimates thetotal number of people who want to work but are unable to find employment.
The state of the labor market, as well as the lackluster productivity trends, suggest thatthe rate of economic progress has slowed down. But smart public policy could reverse theseunenviable tendencies. Various growth-enhancing reforms are, in principle, available.
Policy makers could raise the odds of an economic revival by enacting tax reform, investingin infrastructure, overhauling the immigration system, or carrying out an ambitious tradepolicy. There was some encouraging news last year when the research and developmenttax credit was made permanent, but research could be supported further by moregenerous grants, for example for medical breakthroughs.
Moreover, the U.S. has neglected the maintenance of both its physical and digitalinfrastructure. A recent assessment from the International Monetary Fund warned thatdata infrastructure in the U.S. still contains too many blind spots, arguing that “thecomprehensive information needed to fully assess and understand financial stability risks”is lacking. These issues are directly connected to productivity, because roads that are notmaintained impede travel and trade. It should also be clear that countries waste valuableresources when they rush to do emergency repairs due to insufficient maintenance ofproductive assets.
Finally, there is ample room to mend a variety of aspects of governance. It would be usefulif political representatives refrained from creating periods of fiscal uncertainty by delayingbudgets and appropriation bills. Multiple worthy reforms have been thwarted by politicalgridlock in recent years. While sensible and predictable public policy is desirable regardlessof the current state of the business cycle, good governance would be particularly valuabletoday, so that people’s creativity can be channeled into greater productivity and newinventions.
The author is a research analysts at the Peterson Institute for International Economics,based in Washington, D.C.
