US productivity: Financial crises are too often followed by slow and meagre recoveries. It could happen in America, if business productivity slumps. The omens are not good, thanks to bad trends in innovation. Washington can help. While cutting deficits, it should promote growth. Economists like to say productivity isn't everything — but in the long run it comes close, as far as GDP growth is concerned. Real growth is basically the product of the number of workers and how much each produces. And if economist and productivity guru Robert Gordon of Northwestern University is correct, US productivity is about to weaken.
Gordon argues that the 1990s productivity surge was primarily driven by the Internet. Then drastic corporate cost-cutting in the early 2000s helped the good trend continue. Going forward, though, Gordon expects diminishing returns from the IT revolution. Most of the product innovations since 2000, such as iPods and the new 3-D televisions, have been directed at consumer enjoyment — not business productivity.
If Gordon’s findings don’t cause concern, perhaps two other distinguished professors will. Carmen Reinhart and Kenneth Rogoff looked at the effect of past financial crises around the world on economic growth. Their conclusion: growth rates slow down when government debt reaches 90 per cent of GDP. The United States is on track to hit that level in 2020, according to the Congressional Budget Office.
Gordon forecasts that the annual rate of labour productivity growth will fall from just over 2 per cent between 1996 and 2007 to 1.7 per cent. That is not huge, but combined with a slower rate of growth in the workforce, the GDP growth rate will drop from 3.1 to 2.4 per cent. Reinhart and Rogoff aren’t making predictions, but the financial drag could bring the rate down further.
President Barack Obama has a new deficit commission to address the debt challenge. Maybe he should also appoint an innovation commission, and then act on its recommendations. Those might include more investment in basic research and a tax system that favours investment over consumption. Faster productivity growth won’t heal all of America’s economic ills. But without it, they will look a lot worse.
