Productivity Remains Key for Prosperity and Good Policy Remains Key to Raising Productivity

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Gavyn Davies writes in an April 30, 2017 Financial Times piece that “there have been some signs that productivity growth may be starting to recover from the low points reached a few years ago.”  Davies notes that Jan Hatzius from Goldman Sachs shows somewhat improving labor productivity growth starting in 2016 – Hatzius used official data and numbers from the Institute for Supply Management (ISM) purchasing manager’s index.  And Juan Antolin-Diaz is slated to publish work in the Review of Economics and Statistic next month showing an increase in trend productivity growth from 0.3% in 2012 Q2 to 0.7% now.  Davies himself, however, concedes that these numbers are tentative.


As Davies writes: “With U,S. labour utilization having little further room to grow, productivity has now, for the first time since 2008, become the main constraint on the GDP growth rate.”  Productivity growth is essential in reaching Treasury Secretary Mnuchin’ stated goal of “sustainable” GDP growth of 3% a year.  It is possible that inflation has been overestimated in the past and the impact of new technologies – such as the introduction of the smartphone – have been underestimated.  But even if one accepts Hatzius’ view that productivity growth has been understated by as much as 0.5% to 0.75% a year, that is still a long way away from the labor productivity growth of 2.25% a year needed to reach the 3% GDP growth target. 


So the question is, how to get to that higher rate of productivity growth?  Davies mentions factors that are holding productivity growth back such as “slower rates of technological advance, the ageing of the population and slower advances in education.”   Technology holds the key to the future.  The optimistic vision is perhaps best articulated by Michael Mandel and Bret Swanson in their recent report on “The Coming Productivity Boom.”   They argue that IT investments in manufacturing, agriculture, healthcare, transportation and energy” will increase productivity.  Some of this might happen on its own, but Mandel/Swanson offer a suite of policies that will help (see page 26 of the report).  Investing in human capital is absolutely key in this regard, including getting the right workers from around the world. 


SIIA sees the potential large upside as well and considers that smart public policy can help drive productivity growth.  But getting to labor productivity growth of 2.25% a year will require help from good public policy.  The IMF writes in “Gone with the Headwinds: Global Productivity” that a “revival [in productivity] driven by artificial intelligence and other breakthroughs is conceivable, although its magnitude and timing are difficult to predict.”  The Fund argues that, among other policies, attention should be given to “strengthening innovation, education, and training policies.”  This is certainly consistent with SIIA’s analysis in “Artificial Intelligence and the Future of Work.”  We write:


“In the short, term policymakers should provide additional resources to educational and training programs to provide the U.S. workforce with 21st Century skills.  In the medium term, policymakers should consider funding initiatives to develop efficient human-machine collaborations for workplace applications, and human capital investment in the skills humans will need to work alongside increasingly capable machines."


Besides investing in the workforce, it is crucial not to make policy choices that would actually inhibit the development of productivity-enhancing technologies such as artificial intelligence.  This is why SIIA has written that a tax on robots is absolutely wrong-headed as it would have the effect of slowing down the adoption of artificial intelligence.  Instead, policymakers should find ways to ensure a kind of virtuous feedback loop of investments in the workforce that allow the full potential of robots to be raised while at the same rewarding labor’s contribution correctly.  That requires sophisticated welfare and tax policies, but they will be essential in order to increase productivity in a politically sustainable fashion.   


There are many other things that need to be done to improve productivity but making the most of American workers, and continuing to be able to recruit when needed from around the world, are absolutely essential to raising productivity and in the long run raising incomes for Americans.

Carl Carl Schonander is Senior Vice President for Global Public Policy.