Productivity Gains Are Still An Option For Growth

...What's more: if real productivity gains were possible throughout populations, how might they ultimately affect long term growth potential? It's worth remembering that even though productivity has stalled to some degree, by no means does the present situation have to remain as it is. There's quite a difference between stalled productivity due to a lack of imagination, versus a lack of political will. Chances are, much of the problem in this regard is due to the latter.

Nevertheless, John Fernauld of the San Francisco Fed, is one among many who believe a relatively slower productivity will be the norm in the years ahead. As it turns out, gains from the IT revolution were of a temporary nature, in that much benefit remained within the bounds of specific institutions instead of spreading through the marketplace as a whole. In a working paper, (pdf) Fernauld noted that three of the past four decades experienced lower productivity levels, thus he assumes that the return to a lower level may be normal.

In a recent post, Dietz Vollrath (The Growth Economics Blog) highlights John Fernauld's paper, and states:

What Fernauld's results imply is that the economy is not as far from its potential GDP as we might think.

Unfortunately, it's a conclusion which presently makes sense. That is, given the reticence all around on the part of many, who - until the Great Recession - continued to promote economic growth. Today, growth tends to be associated with high inflation and economic disruption, even though labor force participation leaves a lot to be desired. Hence, questions remain. Who is willing to live with with that assessment? Who is not, and why? How do we know for certain it "isn't possible" to have strong productivity and strong employment at the same time? Regular readers - by now - know that this blogger isn't ready to give up on growth potential.

Monetarily, too many lives were disrupted by "musical chairs" which are still missing. These individuals have little recourse or alternative action - a circumstance which drags on longer than most people are comfortable thinking about. Monetary policy makers might once again affirm their belief in growth potential, even to the extent of repairing the output gap. Just the same, real dialogue and societal coordination needs to occur across a wide swathe of supply side efforts. Even though central bankers can promise monetary action where it is needed (and a nominal level target is best), they still have to follow the lead of others, in order to make an improved growth trajectory a reality.

However, there are still many obstacles to overcome before production reform is a possibility. For instance, the IT which is already in place, could have achieved far more than it was ever given the chance to provide. While there are numerous examples I could offer in this regard - particularly in healthcare, just thinking about the mass scale of these inefficiencies is painful, because I have witnessed them firsthand for so long. The unwillingness of institutions to utilize digital knowledge across institutional lines has already caused considerable damage, both social and economic.

What's more, that doesn't even count potential innovation in environment and workplace structures. Imagine the leisure time option so many in the U.S. would gain, were real innovation and flexibility ever allowed in building materials. In a comment to Dietz Vollrath's above linked post, I emphasized what could have taken place, which would have meant a better growth outcome:

Much of the current downshift in growth is a result of service economy dynamics, and the fact they are not yet able to tap into digital gains across institutional boundaries. That also prevents many services in their present form, from becoming self-sufficient mechanisms for knowledge use.

He was so kind as to respond:

You're right - if there is some "leap" of IT to other sectors, then there is not reason we could not have another wave of productivity increases that temporarily increase the growth rate. But as of now, that hasn't happened, and growth in labor productivity seems to be back to pre - 1995 rates.

There's much to be said for keeping the focus on improved productivity, and such efforts could eventually assist in closing the remaining output gap. To be sure, it's not easy to change aggregate supply factors across the board, thus a process of renewed supply side growth would likely be gradual. While aggregate demand can be coordinated at national levels, substantial aggregate supply reform would be a grass roots, decentralized process.

It helps to remember, that supply side discussions are not the responsibility of monetary policy authorities, even though they would certainly want to keep up with ongoing activities should they occur. Just the same, supply side dialogue should be something that progressives, conservatives and libertarians could all get behind. After all, doing so would mean greater inclusion and economic access, innovation in the areas of the economy where it is needed most, and local investment opportunities for people at all parts of the income spectrum..