Why Reviving Productivity Is a Moral Imperative

(Bloomberg View) -- The U.S. is a land of diminished economic prospects. Today the recession is over but the slowdown isn't: The most recent projections by the Federal Reserve imply future growth in output per head of barely 1 percent a year.

That matters for many reasons. For one thing, as Benjamin Friedman argued in "The Moral Consequences of Economic Growth," a visibly improving material standard of living supports broader kinds of progress. When people feel they are moving ahead, they're apt to be more tolerant. Their taste for social justice is greater too -- and they're more willing to pay the taxes that ambitious social programs require. When people feel they're working merely to defend, not raise, their standard of living, they become more narrow-minded and grudging. Thriving economies tend to be thriving societies; stagnating economies breed friction and discontent.

In addition, economic optimism can be partially self-fulfilling. Expectations of rapid growth promote ambition, investment and risk-taking. Expectations of sluggish or slowing growth do the opposite. "Animal spirits," to use Keynes's term, may be hard to measure, but there's no denying their economic power. Slowing growth and creeping pessimism can form a vicious circle.

QuickTake Productivity

In short, growth matters even more than you might think. And that's a problem, because many of the pressures bearing down on mass prosperity will be difficult and maybe impossible to abate.

A main cause of the current decline is slower growth in economic efficiency -- that is, in the amount of output yielded by given inputs of capital and labor. In recent decades, so-called total factor productivity in the U.S. has increased by less than 1 percent a year, well under half as quickly as in the 50 years to 1970. And during the past several years this measure of productivity has grown at a crawl, rising less than 0.5 percent a year.

Robert Gordon describes four current "headwinds" in "The Rise and Fall of American Growth." First is demographics: The labor force is growing more slowly, which means slower growth in output. Second, growth in the 20th century was powered by rising numbers of Americans completing high school, a one-time transition that's over. Third, globalization tends to worsen inequality -- within the U.S. at any rate -- by rewarding the highest-skilled workers and owners of capital more than the moderately skilled or unskilled who make up most of the population. Fourth, public debt has risen and will have to be serviced; in due course that's likely to mean higher taxes.

It would be hard to exaggerate the implications of this slowdown. Seemingly modest differences in growth rates, sustained over decades, yield enormous differences in outcomes. With per capita growth of 1 percent, average incomes double every 70 years. With growth of 2.4 percent -- the rate achieved between 1948 and the early 1970s -- that doubling happens in the course of a generation. The slowing of U.S. growth, if it lasts, will transform for the worse the prospects of today's young Americans and their children.

In principle, innovation could come to the rescue, but Gordon is famously pessimistic on that score as well. His view is not that innovation has stalled, merely that there's no reason to expect it to accelerate from the relatively sluggish pace of the past several decades. The breakthrough innovations, he argues, came much earlier. That view, together with the four headwinds, suggests that the U.S. is indeed stuck in a low-growth trap.

This possibility raises many questions. How clear is it, for instance, that innovation cannot rise to the challenge of maintaining high growth? Are there ways to speed the introduction of new technologies, or to improve efficiency in other ways? Might there be remedies for some or all of Gordon's headwinds -- policies to increase labor-force participation, educational attainment, greater equality, and more moderate levels of public debt?

The first step is to fully recognize the issue -- both its gravity and its scope. Understanding the challenge of long-term growth is not mainly, let alone exclusively, a matter of short-term economic management. Unfortunately, that's how the issue is usually approached.

Neglected by comparison are some harder and deeper questions. What do growth and productivity even mean in an economy that has moved from manufacturing (whose products can be counted) to services (which can't be)? Do economies driven by information and software need new metrics for progress? And what, if anything, can an economy at the technological frontier do to make living standards rise faster?

Answering these questions is a lot harder than asking them. But asking them is a start.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.

To contact the author of this story: Clive Crook at ccrook5@bloomberg.net.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.

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