The Productivity Slump and What to Do about It

Jared Bernstein:

The productivity slump and what to do about it: ...today, I’d like to explore ... the significant downshift in productivity growth. ... I’m afraid the slowdown is real... I think there are 5 reasons: slower growth of capital per worker, slower TFP, capital misallocation, the absence of full employment, and dysfunctional government (labor quality has been pretty constant, so it isn’t much implicated in the slowdown). ...

First, as I detail here, there’s The Big Short problem: we have been misallocating capital to non-productive finance. ...

Second, we are failing to tap a full employment productivity multiplier (FEPM). Among the pantheon of wrong-headed economic theories is the one that says: firms failing to operate at the edge of their productivity potential will be competed out of business by more productive firms. Unfortunately, in slack labor and credit markets, inefficient firms can handily maintain profit margins by squeezing workers and rolling over cheap loans. At full employment, workers have more bargaining clout, labor costs go up, and inefficiencies become more costly (Josh Bivens agrees and offers some evidence.)

Third, analysis by Barry Eichengreen et al suggests that dysfunctional government eventually grinds down productivity growth. This strikes me as intuitive: an $18 trillion economy requires a government that can efficiently diagnose problems and prescribe solutions in areas of climate, infrastructure, education, innovation, social insurance, poverty and more. Our government, on the other hand, tends to engage in aimless votes to defund Obamacare and shudder the EPA and IRS.

So, how can we better allocate capital, move toward full employment and restore functional government? ... A deep infrastructure dive ... would be a big twofer, both on the productivity and full employment fronts. And by tightening the job market, there’d be positive feedback impact from the FEPM. ...

But here’s another idea with multiple benefits in this space: pay for these productivity enhancing investments with a small tax on financial transactions. That would both raise revenues needed for public investment and raise the cost of non-productive, “noise” trading. ...