Worker Productivity Growth Hits New Low - What Can Be Done?
1. Worker Productivity Growth Weakest in Over 50 Years
2. How to Reverse the Trend of Falling Productivity Growth
3. What President Trump & Congress Should Consider
4. Conclusions – We Can’t Let This Trend Continue
President Obama is spending his last days in office trying to shore-up his “legacy.” He emphasizes that he inherited the worst economy since the Great Depression and most analysts would agree that is true for the most part. Mr. Obama also claims that his policies saved America from another depression and led to one of the longest economic recoveries on record.
Of course, we all know that this recovery, which began in mid-2009, has been the weakest post-recession economic rebound since World War II. There has been much speculation on why this recovery has been so anemic. Conservative critics routinely blame Obama’s big government tax, spend and overregulation policies.
While President Obama’s liberal policies have contributed to slower economic growth, most respected analysts agree that we have a much more serious problem that started long before the current occupant of the White House took office. That is the long-term decline in worker productivity growth which will not be easy to reverse.
Growth in worker productivity has been declining for decades, and this year it is close to zero for the first time since such records have been kept. While there is not widespread agreement among economists as to what exactly is causing this troubling trend, today we’ll look at some of the most likely causes.
If President-elect Trump is serious about boosting the economy, and I believe he is, he must address this foundational problem of falling worker productivity growth. As we go along today, I will discuss some of the leading ideas for reversing this serious trend. Let’s get started.
Worker Productivity Growth Weakest in Over 50 Years
As illustrated in the chart below, growth in US worker productivity peaked in the late 1960s when it was briefly above 3%. While there have been ups and downs along the way, the trend has clearly been lower. And since 2007, the trend has been sharply lower. Worker productivity growth in 2016 has fallen to only 0.5%, a fraction of what it was in the late 1960s.
This chart is stunning. Today, the growth of US worker productivity – the amount of goods or services produced per hour – is less than one-fifth of what it was 50 years ago. Let that settle in. This chart illustrates how our economy has been so anemic for the last 10 years. But it doesn’t explain why. So let’s delve into the reasons.
Before I begin the analysis of weakening growth in worker productivity, maybe I should take a moment to explain the term “per capita GDP growth.” Per capita GDP is a measure of the total output of a country that takes Gross Domestic Product and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another, because it shows the relative performance of the countries.
GDP is one of the primary indicators of a country's economic performance. It is calculated by either adding up the annual incomes of all working-age citizens, or more commonly, by totaling the value of all final goods and services produced in the country during the year.
A rise in per capita GDP also signals growth in the economy and usually indicates an increase in worker productivity. Per capita GDP is often used as an indicator of the overall standard of living, with higher per capita GDP equating to a higher standard of living. Obviously, rising per capital GDP growth is a good thing.
How to Reverse the Trend of Falling Productivity Growth
As everyone knows, President-elect Trump has made some huge promises about reviving economic growth in this country. While I expect that many of his promises are too optimistic to be completely fulfilled, there are a number of things that could be done to strengthen the economy, and specifically to help reverse the downward trend in worker productivity growth.
First, a bit of economic history. From World War II to 1973, labor productivity – output per hour of work in the business sector – grew at a brisk 3.3% a year. Living standards (measured in GDP per capita) nearly doubled in a quarter of a century, or roughly a single generation.
Around 1973, productivity growth slowed, a drought that lasted for about two decades and was accompanied by a lot of angst about the capacity of the US economy to deliver a higher standard of living for the American middle class.
Yet around 1995, productivity growth perked up again, rising to almost post-World War II levels, a boom tied in part to the spectacular drop in the price of computing power – which also helped spread the benefits of the Internet throughout the economy. That spurt lasted for about a decade and then abated.
Since 2004, labor productivity growth has been growing at only 1.3% a year on average, and even more slowly lately as seen above. At the pace Federal Reserve policymakers currently expect the US economy to grow over the next decade or so, it would take more than 70 years, close to three generations, for per capita GDP to double again.
The causes of the recent slowdown in productivity growth aren’t entirely clear. Some analysts blame much of it on flawed statistics – the failure of official government data to properly account for the explosion of free Internet services. Ditto for such innovations as mobile phones that have evolved to replace still and video cameras, tape recorders, radios, compasses, flashlights, etc., etc.
Yet it’s hard to believe that flawed government data, although potentially significant, has increased so much in recent years that it explains the entirety of the recent productivity growth slowdown. So if it’s not mostly mismeasurement, what is it?
A couple of culprits emerge from a quick glance at the data. Economics textbooks teach that productivity of workers rises when they have more capital with which to work – more and better tools, machines, computers, software, etc. Yet growth in business investment spending has been substantially slower in the past eight years.
At the same time, there appears to have been less of an economic boost from technological advances in recent years. Whether that is likely to persist is a matter of spirited debate. Northwestern University’s Robert Gordon argues that it will continue – that we shouldn’t expect a return to rapid technology-driven productivity growth, despite all the headlines about driverless cars and artificial intelligence.
Put differently, we should not expect new technologies to match the power of electricity or even air conditioning to transform the economy, Gordon argues. Some other well-known economists disagree, however.
What President Trump & Congress Should Consider
It may take years for scholars to unravel the productivity riddle. But the next president and members of Congress shouldn’t wait for a consensus diagnosis to take measures to reverse the productivity slowdown. So what public policies might significantly improve our standard of living over the next 10-20 years? Here are a few ideas.
The Government Should Promote Competition. The absence of competition restrains productivity growth by allowing the major players with market power to make big profits without innovating, and to squelch upstarts, which restricts the adoption and spread of new ideas. So the obvious answer lies in government policies to foster more competition.
You may agree or disagree with President-elect Trump’s choices for his Cabinet, but for the most part, they are pro-free-trade, successful business types who are committed to cutting the corporate tax rate and rolling back onerous regulations. That seems like a good start.
Promoting More Private Investment. Business expenditures on plants, equipment, etc. are the lowest in years. Not all private investments pay off, of course, but the more businesses invest, the better the chances that the pace of productivity growth will quicken. Economists and governments have been trying to figure out what drives business executives to invest for decades.
The government does have a couple of significant levers in this regard. Perhaps the most potent lever the government has is the US business tax code. It’s overly complicated, packed with perverse incentives and incompatible with a world in which giant corporations spill over national borders. Trump wants to reduce the corporate tax rate from 35% to 20% or lower.
Spending More on Public Investment. With private investment so weak and interest rates extraordinary low, there’s room for spending more on public investment today without crowding out private investment – particularly investments that the private sector will never make because it can’t capture the returns.
Federal non-defense investment spending – defined by the White House Budget Office as physical infrastructure, R&D, and education and training – soon will fall to its lowest level in at least a half century, measured as a share of the gross domestic product. State and local spending on physical infrastructure has been muted despite very low municipal borrowing costs.
Increased federal investment spending at today’s historically low interest rates makes sense now – but only if it can be done without increasing the budget deficit. Lawmakers will have to find offsetting spending cuts in areas where there is waste or fraud, which should not be too difficult.
Reorganize the US Patent System. There is a growing feeling that it is simply too easy to get a patent. Some also question the length of time that patents protect inventors, especially in some fast-moving industries, and wonder if the maze of patent laws and patent litigation is doing more for law firms’ profits than for the overall economy.
We should be sure the US is striking the right balance between, on the one hand, creating incentives for inventions and innovation and granting patents that create monopolies which last longer than necessary, raise prices, and block new technologies from widespread adoption.
Curtailing Occupational Licensing. More than a quarter of US workers now require a license to do their jobs, according to the White House Council of Economic Advisers. The share of workers licensed at the state level has risen five-fold since 1950, and about two-thirds of this increase stems from an increase in the number of occupations that require a license.
You must have a license to be a florist in some states. Excessive occupational licensing can have several unwelcome consequences, one of which is hurting economy-wide productivity growth by making it difficult for workers to move to careers or places where they could be more productive.
Conclusions – We Can’t Let This Trend Continue
These are but a few ideas for reducing government regulation. I could go on and on. I would suggest that regulations could be cut in every government department – including federal, state and local – to make an environment that is better for worker productivity growth.
It is widely estimated that compliance with federal regulations alone costs the economy over $250 billion a year. I believe the actual number could easily be double that. I hope that President Trump will pursue his promises to cut the size of government and roll back onerous regulations across the board.
With worker productivity growth now near zero (0.5% in 2016), we are in real danger of seeing actual worker productivity go negative in the next few years. The good news is that we know at least some of what has caused this, and we know some of the actions that are necessary to address the problem – if only we have the will.
MERRY CHRISTMAS EVERYONE!!
Warmest holiday wishes,
Gary D. Halbert
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