THERE WAS more lackluster news about productivity from the Labor Department on Wednesday, which means that a key engine of overall economic growth remains stalled. Specifically, output per private-sector worker rose at an annual rate of roughly 1 percent in the second three months of the year, better than last year’s, but still well below the postwar average and too slow to support any significant improvement in the economy’s 2 percent annual growth rate. What to do about this may be the most important economic challenge facing the United States. As Federal Reserve Vice Chairman Stanley Fischer noted recently, living standards can double once every generation with 2 percent productivity growth; at 1 percent, that same improvement takes two generations.
Expect improving productivity to be one of the key talking points when Republicans in the executive and legislative branches resume their campaign for tax reform after Congress’s August recess. House Speaker Paul D. Ryan (R-Wis.) touted corporate tax reform as a solution for slow productivity in his “Better Way” policy agenda last year. And it’s true — corporate tax reform could encourage businesses to invest in productivity-enhancing capital, and to enhance the efficiency of investment decisions, assuming lower rates are applied to a tax base purged of special-interest loopholes. Whether Republicans can actually be trusted to deliver a fiscally responsible rewrite of business taxation, as opposed to deficit-financed tax cuts for corporations and wealthy individuals, is another matter.
In truth, federal taxes are only one factor affecting productivity — and not necessarily the most important. Many productivity-enhancing measures might require more government investment, and taxpayer resources to pay for them: health care to keep workers functioning at their best; education to enhance workers’ skills; basic research to spawn new technology; infrastructure to speed movement of people, goods and information. Deregulation, another Republican panacea for productivity, has its place, too. But much of the needed reform involves not health and safety rules at the national level but trimming excessive professional licensing requirements at the local level. An underappreciated source of low productivity may be obstacles to worker mobility created by local land-use rules, which have the effect of making it harder for people to find affordable housing near their jobs, according to a 2015 study by President Barack Obama’s Council of Economic Advisers.
When it comes to improving productivity, then, the coming push for tax reform has the potential to do some good — but also mischief. Even good-faith policy prescriptions suffer from the same flaw, which is that productivity remains one of the least understood and, indeed, least precisely measured concepts in all of economics. Improving worker efficiency probably depends as much on maintaining broadly supportive economic and social conditions as it does on this or that specific line in the tax code or Federal Register. And while achieving those conditions sometimes requires less government intervention, sometimes it requires more.
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