Low productivity is a drag on U.S. living standards

Forget job creation, tax cuts or returning any bygone industry or sector back to its glory days. I ran into former Federal Reserve Chair Ben S. Bernanke in the green room of “CBS This Morning” recently, and he reminded me that the real key to boosting economic growth and, more importantly, living standards is labor productivity.

The reason is easy to understand. “In the long run, what we can consume as a nation is closely tied to how much we can produce,” wrote Bernanke more than a decade ago.

Productivity is a measure of economic performance that compares the amount of goods and services produced with the number of labor hours used to produce them. Increased productivity can lead to higher income, greater leisure time or a mixture of both. Productivity growth can come from technological advances, greater investment in machinery and equipment by businesses, increases in worker skill and experience, and other improvements to production.

The government’s most recent report on productivity for the first quarter of this year found that it fell at an annual rate of 0.6 percent from the prior three months. It was the worst performance in a year — and that’s saying something, considering that productivity has increased at an annual rate of less than 1 percent in each of the last six years, near the lowest level since 1982, when the U.S. was mired in a doubledip recession.

Taking a longer view, from the early 1970s until about 1995, productivity growth averaged about 1.5 percent per year, below the post-World War II average of 2.1 percent. But then something big happened: Between 1995 and 2000, rapid technological progress and increased investment in the advances that occurred led to a spike in productivity, about 2.5 percent per year. Then things really took off: From the end of 2000 to the end of 2003, productivity rose at a 3.5 percent annual rate.

Anyone who lived through the late 1990s boom felt like the world was really changing. Even economists were impressed. In 1999, former Federal Reserve Chairman Alan Greenspan noted “the forces unleashed by the Internet” were “potent” and that a “whole new set of profitable investments raises productivity.” Later, in a 2006 speech, Bernanke noted, “a case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time.”

With hindsight, we now know that the productivity miracle of the 1990s did not usher in a new economic era: From 2007 to 2016, labor productivity averaged 1.1 percent, and over the last five years (through 2016) it grew at an average rate of just 0.7 percent, according to the BLS.

This is not meant to second-guess Greenspan or Bernanke; rather, as Bernanke noted last summer, “the recent decline in productivity growth has been both large and mostly unexpected.” If productivity does not pick up, the U.S. will become a large, developed economy that grows only slowly (think Japan).

Additionally, as the debate over potential tax cuts continues in Congress, it may be helpful to keep productivity in mind. While some extol the virtues of tax cuts as a spur to growth, most economists say that the proposed changes would only increase U.S. growth by approximately 0.3 percent, to 2.3 percent annually.

Before you get too depressed about the current low level of productivity, the good news is that it is incredibly difficult to predict where the next burst might come from. There’s every chance that the current period will become a footnote, rather than the beginning of a protracted era of slow growth.