It is safer to rely on what we know, rather than speculate on what may happen

This opinion piece was published in: Symposium of Views on ‘Does the Conventional Wisdom About Productivity Need To Be Reconsidered?, The International Economy, Fall 2017, pp. 26-27, by

"Conventional wisdom holds that U.S. productivity growth, the weakest it has been in more than a quartercentury, is the reason for today’s subpar GDP growth and low wages. Because of coming demographic and technological headwinds, some think this disappointing economic scenario will be baked in the cake for decades. But is the conventional wisdom correct? Is productivity being mismeasured, and is technology-driven innovation already having a more powerful effect than realized? Is the problem that the diffusion process of spreading the positive effects of innovation takes time? Is productivity growth therefore on the launching pad ready to rebound? Would better policies lead to sufficient investment in capital equipment and software? Or is the slowdown in productivity growth a result of a decline in demand and a weak labor market that has kept wage growth soft? Would companies invest more in productivity-enhancing innovation if the economy were experiencing more robust wage growth and tighter labor markets? In that case, weak productivity growth may be slowing GDP growth, not the other way around. Or is productivity the great paradox wrapped in a riddle, impossible to truly understand or predict?"

There are many conventional wisdoms about productivity growth and its perspectives. Some of them have been mentioned in your question. Moreover, forecasting future productivity trends is even more difficult because too many factors will affect them.

Therefore, it is safer for policymakers to rely on what we know rather than speculate on what may happen. Sadly, the available statistics demonstrate that productivity growth in the United States and other advanced economies slowed down in the last ten to fifteen years after spectacular increases in 1990s and early 2000s. If mismeasurement has any impact on these statistics, it overestimates productivity growth rather than underestimates it due to underestimation of the contribution of investment in the growth accounting methodology. Most statistical agencies do not capture all investments in intangibles, so they are added to productivity growth, which is a residual parameter.

We also know that slower productivity growth can be explained, to a large degree, by the slower pace of absorption of technological innovations, especially those related to information and communication technologies, as compared to the period of 1990s and early 2000s. The impact of demography, that is, slower growth (as in the United States) or decline (as in Europe and Japan) of the working-age population and population aging on productivity is less clear and requires further analyses.

Perhaps optimists who speak about the revolutionary character of many current and prospective technological innovations are right and one may expect acceleration of productivity growth ten or fifteen years from now, but it is not a very likely scenario in short term. Policymakers cannot build their macroeconomic and fiscal projections based on too-optimistic assumptions because this is a recipe for big trouble.

Policymakers must also create a favorable business climate and enact policies which facilitate breakthrough innovations and their fast spreading. This involves, among others, free trade, stable and innovative financial systems, flexible labor markets, open immigration policies, simple corporate taxation at moderate rates, support to start-ups, and better education. Protectionism of any kind, closing borders, and defending incumbents against competition of newcomers (including foreigners) and “creative” destruction will kill innovation and productivity growth.