As inflation and government debt surge, Washington is ignoring our most critical economic crisis
Economic crises of all sorts loom on the horizon, ranging from high and rising federal debt, to high and rising inflation, to unsustainably high and rising housing costs. But the most important crisis we currently face is one you never hear about: historically low labor productivity growth.
Raising productivity growth is crucial. If we don’t do this, inflationary pressures will rise even more, we will struggle to manage all the federal debt we have already accumulated and the living standards of future generations will be much lower than they should be.
Despite this grim potential economic future, there is nary a word from Washington, D.C., policymakers about this challenge. Not from the White House, not from the Federal Reserve and not from Congress. Economic policies can make a big difference for productivity growth. But recent record spending, including Biden’s $1.9 trillion COVID-19 relief plan, did not incentivize higher productivity, and the future taxes required to pay for the debt used to finance this relief may well depress productivity growth even further.
Productivity growth fell significantly and abruptly in 2007, and it has never recovered. Since 2007, productivity has grown just 1.4 percent per year. But between 1948 and 2006, worker productivity grew at nearly 2.6 percent per year. This 1.2 percent annual difference is a very big deal, because at 2.6 percent, productivity, output and incomes will double every 27 years through the magic of exponential growth. But at 1.4 percent productivity growth, it now takes almost 50 years to double productivity, output and income.
The long-run consequences of today’s productivity growth are staggering. But this crisis isn’t just about living standards decades from now. This growth shortfall already has impacted our economy enormously. If productivity had grown at its historical level since 2007, my calculations show GDP would be nearly $5 trillion higher than it is today.
Calculations also indicate that accumulating these continuing output losses due to deficient productivity growth since 2007 means we have given up more than one year’s worth of GDP, which is currently valued at more than $22 trillion.
Those resources could have been used to eliminate our entire, privately-held national debt or increase our capital stock, including housing capital, by one-third, or dramatically improve the federal government’s unfunded liability position.
Productivity grows through several factors that enhance the ability of workers to produce, including business investment and innovation, technological breakthroughs and rising worker skills. But there is no evidence that productivity growth is rebounding. Business investment remains depressed, the population is aging and our schools continue to underperform.
What to do? It has been recognized for decades that regulation in the United States depresses productivity and takes cash away from workers, particularly among small companies. But despite this recognition, not enough has been done. The National Association of Manufacturers estimates that small manufacturing businesses (those with fewer than 50 employees) pay nearly $35,000 in federal regulatory costs per worker. The federal government and state governments should create bipartisan commissions to evaluate regulations from the ground up and determine which regulations do not satisfy a cost-benefit assessment and eliminate those that do not measure up.
Social Security, Medicare, Medicaid and unfunded pension liabilities continue to push us closer to a debt crisis. Lawmakers in both parties have ignored this problem for years, and they perceive no payoff from taking it on. It is time for Congress and the president to address these issues while there is still time. Such a resolution would clarify the future for investors and businesses that need such clarity to commit to long-term investments.
Much of our public K-12 education system is failing students, particularly those from the poorest families. For far too long, education unions and politicians have created a cozy relationship in which politicians receive union support and politicians in turn support education unions. Reforming teacher tenure, which is sometimes awarded even before two years of teaching, implementing merit-based pay and higher pay for math and science specialists (most pay is determined by seniority, and pay is rarely tied to educator specialization) and creating more school choice are critical reforms needed to develop our children into skilled workers who will be able to compete domestically and globally.
Immigration is also in need of reform. Several of our immigrants have become transformational entrepreneurs, creating thousands of jobs and transforming our economy in their journeys. This includes Elon Musk (Tesla, South Africa), Sergey Brin (Google, Russia), and Pierre Omidyar (eBay, France). We need many more of these individuals, which means modernizing our immigration rules to bring in many more highly skilled and innovative people.
Low productivity growth is job one for U.S. economic policymakers. If they can make these changes, productivity growth will rise. But if they do not, the best we can expect is to return to the pre-COVID economy, with even more debt, more inflation and a future that is much less bright for our children, and theirs.
Lee E. Ohanian is a senior fellow at the Hoover Institution at Stanford University and distinguished professor of economics at UCLA.