At the end of a briefing Monday on the Economic Report of the President, I asked Jason Furman, the Council of Economic Advisers chairman, what his favorite chart in the 410-page book is. He replied that his favorite new chart is this one on the trend in total factor productivity — a measure of how efficient we are, taking into account technological advancement — from 1953 to 2012.
Furman and his fellow CEA member, Jim Stock, made the case that the chart is grounds for optimism about the future of the economy. Some have argued — notably Robert Gordon of Northwestern University — that productivity growth over the past 40 years has been sub-par and, just by carrying that trend forward, we can expect less robust economic growth in the future. (He also worries about other headwinds, like a shrinking population of working-age Americans because of the retirement of baby boomers.) Furman and Stock argued that the past decade-and-a-half has been reasonably good for productivity growth — and that means economic growth might be pretty good in coming decades despite a smaller labor force. There still remains a big open question, however, about whether a broad share of the population will benefit from that growth.
Here's how the report describes what you see happening in this graph:
The growth of total factor productivity can vary widely year-to-year, but the longer-term trends can be broadly illustrated by splitting the last 60 years into three periods, as shown in Figure 1-13. First, from the 1950s through the early 1970s, total factor productivity grew at a relatively rapid 1.8 percent annual rate, fueled in part by public investments like the interstate highway system and the commercialization of innovations from World War II like the jet engine and synthetic rubber. Then, from the mid 1970s to the mid 1990s, the rate of total factor productivity growth slowed substantially, to just 0.4 percent a year. The causes of this slowdown have been the subject of extensive academic debate, with some evidence pointing to the disruptive effect of higher and volatile oil prices. Finally, from the mid 1990s through the latest available data for 2012, total factor productivity growth picked up to a 1.1 percent-a-year rate, in part reflecting vast improvements in computer technology and software during this time. Although differences across these episodes may seem small, over time they compound to enormous differences in output and living standards.
In other words, World War II-era innovations powered extremely high productivity growth for much of postwar period, and then a series of economic events, including higher energy prices, dramatically reduced productivity in the 1970s and 1980s. But the information technology revolution that lifted productivity once again started in the latter half of the 1990s — not as high as it was after World War II, but significantly higher than during the 1970s and 1980s.
The report goes on to explore the implications of decent productivity growth for the future of the economy.
While the growth rate of total factor productivity is always critical to an economy’s long-run potential, the projected slowdown in the growth of America’s workforce due to the aging of the population places even greater emphasis on productivity going forward. Since an economy’s potential output depends fundamentally on the number of workers and the average output per worker, slower productivity growth can in theory be offset by rapid population growth. And during the aforementioned 1974 to 1995 period marked by slower total factor productivity growth, the working-age (16 to 64) population continued to expand at a solid rate of more than 1 percent a year. However, the Census Bureau projects that over the 20 years from 2012 to 2032, the working-age population will grow only 0.3 percent a year, largely a consequence of the aging of the baby boomers into retirement. Thus, looking ahead, productivity-enhancing investments are likely to be as critical as ever.
Elsewhere in the report, the White House highlights the challenges associated with relying on technology to boost productivity. For several decades, productivity has grown much faster than average wages. That's because the financial rewards of new technological developments that allow for greater efficiency have flowed to the top earners. The White House's response is to stress that it also wants to expand education and promote policies that enable a greater proportion of the workforce to enjoy the fruits of faster productivity growth. But it's an open question of whether that will happen.