Debt Considerations, and the Missing Role of Productivity

When someone seriously addresses the debt to GDP ratio, I am inclined to listen, and Alice Rivlin's recent testimony to the Joint Economic Committee is worth the reader's time. The title is also appropriate: "Rising debt - not a crisis, but a serious problem to be managed."

Consider the parallels, between a growing urgency to address rising debt via sustained measures, and the urgency of addressing the hidden unemployment of a gradually declining labor force participation rate. Until now, neither have been directly confronted, in part because of the underlying complexities involved. Granted, Washington may not yet have reason to believe that important links exist between the two, but over time, perhaps those links could be established.

Government budget problems which originated in the 20th century are somewhat different from earlier budgets, given the substantial portion which exists as a response to insufficient production of knowledge based product in the marketplace. All too often, government budgets now attempt to make amends for what were arbitrary production limits - limits which not only negatively affect countless bottom lines, but also the ability of individuals to freely interact in the marketplace.

For important aspects of knowledge based services production, this particularly holds true in rural areas. Compared to the rest of the population, rural residents are especially dependent on government, and the knowledge product of prosperous regions. Even though they often fund public education locally via taxation, they don't get local or direct services results, for their own expected responsibilities in this regard.

Productivity is missing in our rural areas. Were it possible for rural residents to engage more directly in the production of knowledge endeavor, their participation could eventually help ease the burden of government debt, as well. Even though tradable sectors generate production gains when less personal interaction is required, time based services - via mutual employment coordination - would generate greater productivity by make more personal interaction part of the process. As Alice Rivlin stressed:

We need policies that help grow the GDP faster and slow the growth of debt simultaneously.

Absolutely. Of course, getting there is not quite a straightforward process, in spite of this assertion on her part:

To grow faster we need a substantial sustained increase in public and private investment aimed at accelerating the growth of productivity and incomes in ways that benefit average workers and provide opportunities for those stuck in low wage jobs.

But how does one avoid confusion, concerning the factors which may - or may not - contribute to productivity gains and output over time? The physical infrastructure of the twentieth century contributed to productivity, because it provided more means for all citizens to generate a broader degree of economic activity. Today, however, the highway infrastructure which still contributes to areas that are economically complex, doesn't provide the same benefits for rural areas. Edward Glaeser also notes the diminishing returns which particularly apply to traditional rural infrastructure, in a recent article:

A well-known 1988 Congressional Budget Office survey found that spending to maintain current highways in good shape produces returns of 30 percent to 40 percent - but that new highway construction in rural areas showed a much lower return.

Likewise, the wage gains of 2015 - while good for rich and poor alike, did not reach the residents of rural areas. According to Jim Tankersley:

Median incomes did not budge significantly in rural areas, while in cities they grew by 7.3 percent.

The kinds of infrastructure which could contribute to greater economic complexity where it is most lacking, have yet to be considered. Unfortunately, productivity gains aren't just a matter of ever more contributions for systems which are already strong, even if this is the approach which makes the most sense to governments and private interests alike. For example, in her testimony, Alice Rivlin stated:

We need aggressive economic policies to grow the economy faster and create more and better paying jobs.

Interestingly enough, more jobs on offer in the near future, are likely to be higher skill offerings. The catch is that there's a relative trade off between more jobs versus "better jobs" in a general equilibrium context. It's that trade off which also reflects what existing services capacity actually represents. More services capacity needs to be generated directly. Even though it is likely not possible to lower services costs for today's prosperous regions anytime soon, new services generation for rural areas could take place via more cost effective means. Not only would this ultimately lead to greater productivity for services production, it would mean a long term strategy for debt reduction, as well.