WASHINGTON — An ugly trend has been puzzling, and perturbing, economists. And under President Trump, it might get worse.
The trend is in a measure called “productivity” — basically, how much stuff we produce from a given amount of labor and capital. Productivity tends to rise over time, as new technologies help us find better, more efficient ways to churn out goods and services. Think: mechanized agriculture vs. horse and plow.
When productivity grows, the economy and living standards do, too. If we can produce more output with the same amount of inputs, the country gets richer. Thanks primarily to technological progress, the average U.S. worker today would need to work only about 17 weeks to earn the entire annual income of the average worker a century ago, in inflation-adjusted terms.
Trump has promised to make the United States much wealthier, and even to double the pace of gross domestic product growth. If he wants to achieve anything close to these goals — especially while a large chunk of the workforce is aging into retirement — he needs a burst of productivity growth.
Unfortunately for him, the trends have been heading in exactly the wrong direction.
After relatively brisk productivity growth in the late 1990s and early 2000s, the numbers slowed to a crawl starting around 2005. Worse, the Bureau of Labor Statistics just reported that productivity actually fell last year, for the first time since the end of the Great Recession.
In other words, the richest economy in the world somehow just got a little less efficient.
Experts aren’t sure what’s going on, but they have a few theories.
Some blame mismeasurement and argue that official stats don’t capture the full value of newfangled freebies such as Facebook. But a Brookings Institution paper last year found that counting the market value of all free media would change output and productivity numbers very little. Besides, even in industries far removed from Snapchat, productivity growth has slowed.
Demographics could be to blame, a new International Monetary Fund report argues, since an older workforce can be less productive and innovative. Reduced business dynamism — fewer start-ups and fewer failures of older, less-productive “zombie” firms — may play a role, too.
The most troubling explanation, though, is that we may have already wrung most of the productivity gains we can out of the computer age, and we haven’t seen similar high-value inventions since. Moreover, the next generation of economy-transforming ideas might just be harder to find.
That’s not the same as saying there’s nothing left to invent, though sometimes the argument gets caricatured that way. Promising developments remain in the pipeline, in self-driving cars, the “Internet of Things,” biotech research and so on.
Until then, the policy tools available for increasing productivity growth are limited. They do exist, though, and Trump appears to be not only ignoring them, but pursuing pretty much the opposite agenda.
For example, if you want to get more innovation, you (duh) need more R&D — especially the basic research that could produce gains across multiple industries. Basic research tends to be less attractive to private companies for exactly this reason, though; businesses don’t want to foot the bill if they won’t capture all the proceeds.
That’s why public funding is useful — and why the Trump administration’s plan to cut the budgets of the National Institutes of Health and other science agencies is so backward.
Welcoming more immigrants — who tend to be younger and to found new businesses at higher rates than non-immigrants — would also be helpful, particularly if they’re high-skilled. As would investing in education and training for workers already here.
Infrastructure spending can help promote private-sector productivity, and it’s something Trump has expressed interest in. But his plan to give tax breaks to private firms to build revenue-producing projects is not obviously the right strategy for this goal.
Finally, transformative innovations need not necessarily come from the United States. It’s nice if they do, but if the ideas are big enough, American industries will still benefit.
What may be best for U.S. productivity growth, then, would be to encourage the progress of China and India toward becoming developed market economies — to help draw out from their combined 2.6 billion citizens more “Steve Jobses and Thomas Edisons,” as San Francisco Federal Reserve researcher John G. Fernald puts it.
That probably means — my words, not Fernald’s — more engagement with the world, and a focus on institution-building and freer trade. Broadly speaking, it means no longer viewing the global economy as a zero-sum game.
Again, not exactly at the top of Trump’s to-do list. That’s both his loss and ours.