How to Wake a Sleepwalking Economy

Productivity matters.

By one key measure, the U.S. economy looks sick. Growth in real gross domestic product (GDP) — the stuff that fuels future prosperity, pays for our debts and funds our government — is sleepwalking. The annual growth rate is just scratching the 2.0-percent mark. GDP, the economic elixir of life, is determined by just two activities: the number of people working and their productivity. More people working and doing so more effectively yields more goods and services for all to enjoy.

Labor force growth in June was increasing at a 0.8-percent annual rate and is projected to average just 0.5 percent over the next few years. We know that labor participation is low, we also know that the Trump administration is discouraging immigration, and we know that there are more than 6 million unfilled jobs begging for workers. So the burden for GDP growth now rests on productivity.

This is why last Wednesday's Bureau of Labor Statistics report on labor productivity deserves some attention. The estimate is based on the total amount of goods and services produced divided by the number of workers employed in the economy. By that measure, the annual rate of increase for 2017’s second quarter came in at a paltry 0.9 percent. On a year-over-year basis, the resulting 1.2-percent increase looks a lot better.

When we add the 1.2-percent productivity increase to the current 0.8-percent labor force growth, we get a pale 2.0-percent growth in GDP. And that expected 0.5-percent labor force growth in the future spells trouble. The economy is sleepwalking, for sure, and is not likely to awaken any time soon.

By this reckoning, things look pretty bleak, but the same bad news has been flowing for a long time. From 2005-15, productivity grew at a 1.3-percent rate, but that included the Great Recession. From 1995-2004, productivity grew by 2.8 percent. But that included the microchip-based information technology revolution. And from 1974-94, the productivity count came in at 1.6 percent. Let’s face it: From 1974-2015, the United States, on average, did better than what we are doing now.

Why might productivity be so weak? 

As might be expected, when considering human beings — the ultimate resource — working in a dynamic economy, there are lots of moving parts to consider. First off, the amount of new capital assets employed in the economy matters a lot. New capital investment plummeted across 2007-2013 and remains below par. Perhaps tax reform could change that, but weak is still weak. 

Then, government regulation, which expanded markedly in the last eight years, has laced the economy with production restrictions. Current regulatory reform efforts might loosen some of those restrictions.

The fact that we have more than six million open jobs indicates a problem in matching available skills to the needs of a more sophisticated, knowledge-based economy. Steps now being taken to enhance the educational experience by way of apprenticeships and applied learning may improve this situation.

Finally, there’s the matter of how we measure what is produced — and whether measuring output has become increasingly difficult and therefore less accurate in recent years.

Is it possible that the labor force is really producing a lot more? As pointed out by Google economist Hal Varian in a 2016 Brookings productivity conference, in the last decade, a revolution in smartphones has merged phones and cameras. Meanwhile, the production of cameras, film and developing has plummeted, pushing down GDP growth. Important medical breakthroughs bring new life-extending pharmaceutical products and hospital procedures, while also shaking up the healthcare economy. 

It is always difficult to properly account for new products and procedures. Last of all, there is the matter of producing things that never have been counted in GDP calculations and never will be. Things like reductions in carbon emissions and water pollution, which are not sold in the economy and therefore do not get counted.

Remember, GDP growth — however it is measured — provides a rough estimate of how we are doing. Given the political constraints on labor-force growth, the burden for future prosperity gains rests heavily on improved labor productivity. As a nation, we need to employ more capital —physical and human — and we need to reduce the number of regulatory restrictions that limit the implementation of improvements in how we produce and distribute our bountiful supply of goods and services.

Productivity matters.