By many measures, the U.S. economy seems to be thriving. Unemployment is hovering around 5 percent. We’re living in one of the longest periods of economic growth in our nation’s history. And last year, income growth was at a record high.
But there’s one measure that’s causing concern among economists: productivity growth. Ever since the housing crash, our nation’s productivity — which is a ratio between how much our country produces relative to how much work and resources we put in — has been lackluster compared with earlier periods over the past half-century:
This is an essential measurement in determining the health of our economy. Greater productivity means that we can produce more with fewer resources, which means better living standards for everybody. A slowdown in productivity indicates that we’re not innovating as much as we used to.
But it is also a sorely misunderstood statistic. Economists are constantly in disagreement about why productivity growth has declined. Some blame government policies that stifle young businesses. Others point to “secular stagnation” — that we save too much and invest too little. And still others are less cynical, arguing that we’ve already eaten the low-hanging fruit of innovation and that technology will inevitably become slower to develop as economies advance.
The sluggish economy will likely be one of the most difficult questions facing the next administration, especially as both Hillary Clinton and Donald Trump have relied on projected economic growth as the means to achieve their agendas. What is the most important thing the next administration can do to improve productivity?
Simon Johnson is a professor at MIT’s Sloan School of Management and a member of MIT’s Digital Currency Initiative. He was previously chief economist at the International Monetary Fund
We know what productivity growth requires: investments in new technology. For previous generations, this was factories full of machines, first powered by steam and then by electricity. More recently it was the arrival of computers, which changed how work was organized within and across firms.
We often perceive the impact of new technology imperfectly and with a lag, and today is no different. We can see a wave of hardware and software innovations underway — technologies such as 3D printing and distributed ledgers will allow manufacturing and finance to become more dispersed — but it is hard to know exactly where it will take us.
To make sure the United States remains on the leading edge of this wave, we first and foremost need stronger human capital — economists’ jargon for training and appropriate skills in the workforce. But we also need to create a social governance environment that allows technology to grow. With the right approach, we will be able to share the benefits of new innovation more broadly so that people who cannot work effectively with new technology will not be left behind.
The best response for the next administration includes public investment in education. But what skills exactly are needed? To some extent this is obvious — stronger ability to work with computers, which requires better math skills along with science and engineering. But a constructive and more far-reaching partnership between public education and private sector employers would be a great help. This has not, in the past, been a strong point in the United States. But a modern apprenticeship program could be one piece of the puzzle.
Sometimes businesses ask for tax breaks or other subsidies in order to invest in the people they hire. How about encouraging companies to invest in our communities and ensure better access to opportunities for everyone? Many executives talk increasingly — and genuinely — about wanting to “give back.” Mentoring young people, advising school systems and providing internships (including for high school students) are perfect opportunities to do just that. The next administration could create awards and a public service program to promote this.
We also need to create a suitable regulatory environment for potentially revolutionary innovation — particularly around the “blockchain” technology now under development, which could significantly improve financial inclusion in the United States. Blockchain is a general purpose digital technology with some immediate financial applications but also much broader potential implications, such as running supply chains or handling medical records more efficiently. Up to 20 percent of the population lacks proper or full access to our existing banking system. New, more decentralized forms of finance can boost productivity where it can have the most impact: for people at the lower end of the income distribution.
The right way forward is for the next administration to encourage pilot projects with data that are broadly shared. Regulators should be involved at the level of ensuring consumer protection, but the entire point is to create standards that allow “permissionless innovation,” in order to allow many innovators to propose (and attempt to sell) their own better solutions to important problems.
Significantly improving human capital and expanding the reach of new innovation would ensure that productivity increases across all parts of society — and that everyone really can benefit.