The Single Most Important Thing About the US Economy Sure Looks Broken

By James Pethokoukis – Re-Blogged From the American Enterprise Institute

US productivity in the second quarter grew at the fastest pace since the end of 2013, according to revised government figures. This is good. But if you pull back the camera, longer-term productivity growth remains terribly worrisome. IHS Global Insight:

This update does not change the underlying story. Productivity growth remains low. The slowdown started about 10 years ago. The Great Recession muddied the data, making it difficult to tell whether the slowdown was a byproduct of the business cycle or something fundamental. In recent years, it has become clear that something was fundamentally off.

Productivity’s slow pace has the profession puzzled. Some economists have concluded that today’s innovations are simply not as path-breaking as those that supported previous productivity booms. Others believe that the numbers are plain wrong because government statisticians have not figured out how to measure the value of recent innovations.


Should we be worried about productivity? If the numbers are being measured correctly, yes because in the long-run, productivity is the best measure of an economy’s success. Applying the Rule of 72, if growth is 2%, the pie doubles every 35 years, if growth is 1%, it doubles every 72 years and, as it is now, if growth is 0.5%, it doubles every 144 years.

Or look at it this way: Capital Economics points out in a recent note that real worker compensation has increased by an average of just 0.6% over the past decade vs. 2.3%, 1995 to 2005. But without “the slowdown in productivity growth that began a decade ago, real incomes would be 10% higher than they actually are today.”

If productivity growth stays this slow and you assume 1% labor force growth, then America’s potential growth rate isn’t even 2%. The pie may double only every half century. While Democrats are focusing on their demand-side, consumer-oriented “middle out” economics, the US economy may well face serious supply-side issues.

Unless, the stats are wrong, as IHS Global alludes to. We may be mismeasuring productivity growth and thus GDP growth. Economist Martin Feldstein:

But the official statistics on GDP growth fail to capture most of the gains in our standard of living that come from new and improved goods and services. That means that the official growth rate does not reflect the rise in real incomes that came with air conditioning, anti-cancer drugs, new surgical procedures, and the many more mundane innovations. Moreover, because the US government does not count anything in GDP unless it is sold in the market, the vast expansion of television entertainment and the introduction of services like Google and Facebook have been completely excluded from the national account.

And economist Brian Wesbury in a morning note today:

So, while the most recent quarter was solid, the past few years have seen productivity improvements noticeably slower than the average gain of 2.3% since 1996. However, we do not think the productivity revolution has come to an end. More importantly, we think actual productivity growth is much stronger than what the government reports. (For example, do the data fully capture the value of new technologies like smartphone apps, the tablet, the cloud,…etc.?) The benefits to consumers and businesses have been huge, but the figures from the government miss the value of these improvements. Most of these amazing productivity boosting technologies are free – and anything free, no matter how much it improves everyday life, isn’t included in output – which means they aren’t included in productivity either. This means our standard of living is improving faster than the official reports show.

Policymakers should assume the worst and act accordingly.


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