America’s missing $11 trillion

BY JAMES PETHOKOUKIS

Increasing worker productivity is critical to raising living standards over the long run. But what does that mean, exactly? Consider this: If the American economy had been able to maintain the rapid productivity growth experienced in the late 1990s and early 2000s, it would have generated an additional $11 trillion in economic output, according to a new Bureau of Labor Statistics analysis. Or to put it another way, not generating that output translates into a loss of $95,000 in output per worker.

Why didn’t that happen? Where’s our $11 trillion? A brief bit of economic history: Right before the 1990s economic boom, there was a dreary consensus that such a thing was pretty much impossible. First, US productivity growth — and that of other advanced economies — had been in a funk since the early 1970s. Second, no one was quite sure why that downshift had happened. Third, the US had just run a big policy experiment — the tax cuts and deregulation of Reaganomics — that had seemingly failed to achieve one of its stated goals — boost productivity growth in a sustained way. Fourth, the computer revolution and corporate IT investment had coincided with weaker productivity growth. As economist Robert Solow famously said back in 1987, “You can see the computer age everywhere but in the productivity statistics.”

Then, right at that gloomy nadir, productivity growth and the economy more broadly started surging — and more here in America more than in other places. Rates of productivity growth hit levels not seen since the 1960s. So that was surprise No. 1. But would that shock acceleration — due to the computer and internet revolutions, and related innovations — persist? Or was it a blip? Then came surprise No.2, another pleasant one: The productivity boom roared right through the bursting of the internet bubble in 2000. Indeed, it sped up. Overall, the BLS notes, US labor productivity growth grew at an average rate of 3.3 percent from 1998 to 2005, 50 percent faster than the long-term average.

Then came an unpleasant surprise. Productivity rates started to decelerate in the early 2000s, and in 2006 fell below that long-term trend line for the first time in a decade. From the BLS: “And, notwithstanding 2 years of high growth in 2009 and 2010 following the Great Recession, productivity growth rates have remained stubbornly low in subsequent years. Many economic observers were yet again surprised, in this case at just how drastically growth rates slowed, given the recently observed high rates of growth and the continued technological innovations that were proliferating throughout the economy.”

From 2005 to 2018 — as far as the BLS report goes — productivity has grown at an average annual rate of just 1.3 percent, and just 0.8 percent since 2010. So what happened? The first-order explanation is fairly straightforward. The largest contributor to deceleration since 2005 — explaining nearly two-thirds of the slowdown — has been a deceleration in multifactor productivity growth. Shorthand for MFP growth is “innovation.” But the BLS describes it as “the portion of output growth that is not accounted for by the growth of capital and labor inputs and is due to contributions of other inputs, such as technological advances in production, the introduction of a more streamlined industrial organization, relative shifts of inputs from low to high productivity industries, increased efforts of the workforce, and improvements in managerial efficiency.”

But why did MFP growth slow? The BLS offers a number of potential culprits that probably form a multicausal explanation:

• declining rates of productivity-enhancing job reallocation,
• rising market power and industry concentration,
• greater restraints on competition,
• growing income inequality,
• the drag from the global financial crisis and Great Recession and its weak recovery,
• diminishing returns to innovation relative to that of the late-19th and early- to mid-20th centuries, and
• a historically wavelike tendency of innovations.

Productivity growth picked up a bit in 2018 and 2019, and then yielded the best number in a decade in 2020 — although take that with a mountain of salt given the compositional effect of the pandemic. “The pandemic crushed lower value-added industries such as brick-and-mortar retail and travel and lifted higher value-added online and technology businesses,” notes Moody’s Analytics in a recent report.

Now maybe this long-term stagnation is coming to an end, something I’ve written quite a lot about. Think about the loss of potential national wealth every year that it continues.