I was excited to read in today’s US print edition of the Wall Street Journal, “Fed Official Calls for More Public Investment“. The article reports how Vice Chairman, Stanley Fischer, raised concerns Sunday about weak US productivity. He was speaking in Aspen, Colorado, ahead of the annual Jackson Hole, Wyoming, conference this week.
Fischer reported that US productivity, that is output per hour worked, grew an average of 1.25% annually between 2006 and 2015, well below the 2.5% annual growth rate between 1949 and 2005. And the US has reported decreases in productivity in the last three quarters, the longest such stretch since 1979.
As the article reports, there is no agreement as to why the US productivity number has been so low. And this situation is not unique to the US; much of the western and developed world has followed pretty much the same pattern.
I have read widely about productivity, since IT plays a key role in it. What I find is quite interesting. First, how productivity is measured suggests some odd ideas. One suggests that we are not experiencing a ‘low’ growth rate period at all, and that the post-war ‘boom’ is the anomaly. Such ideas imply that we are now back on a path consistent with prewar growth patterns.
More generally many economists cannot agree what is preventing more rapid growth. But they tend to agree on what Fischer called for. Despite the headline, his comments were not only or even centrally focused on public funds. He did call for more public money on infrastructure and education. He also called for regulation and policy change and encourage private investment.
Government spending on infrastructure like roads and air do not, on their own, drive productivity; they drive growth due to what is called the multiplier effect. A dollar spent by the government on construction trickles through the economy and is recycled and eventually, due in part to how banking and credit is managed, result in more than one dollar being spent. The problem with this approach right now is that low and negative interest rates are distorting the credit and debt markets so it’s not a slam dunk that the multiplier effect is working. The multiplier effect might be broke or at excessively low dimensions.
Regulation and policy changes do alter the decision making processes of private firms, or so the theory goes. The US start-up rate of new firms (think creative destruction) is at an all-time low, perhaps due in part to regulations that hamper such regeneration and that favors larger enterprises.
Tax policy could also be revamped to encourage capital investment. All these polices are meant to encourage CEOs and CFOs and their boards to spend more in capital and labor, than stock buy-backs and M&A. Quantitative easing and cheap money were meant to encourage the exact same behavior, but that hasn’t happened either.
So all in all its a bit of a mess. No single policy it seems has put us in this bind. More likely a slow gradual confluence of unintended consequences of polices focused elsewhere across the fiscal and monetary spectrum brought us to this spot. So what of us in the IT industry?
I think IT can make a big difference. It was IT that was at the center of the post-war productivity ‘boom’. IT does matter now but in different ways to the way non-IT practitioners understand. It’s our job to explain how IT can act as short- and long-term productivity enablers; we need to explain what is needed in our educational system and industry policy to help improve the way innovation diffuses across the economy. We may also need to explain to policy makers that by measuring the wrong things, the wrong things tend to happen more.
We have quite a bit of work ahead of us. Let’s get cracking!