The economy will be central to both these men's legacies

The answer comes down to productivity growth.

By Chris Matthews
December 7, 2016

Democrats are lamenting that President-elect Trump may reap the fruits of the “Obama recovery” that seems to have been accelerating in the second half of this year. But it may be that the Obama economy isn’t exactly as strong as his boosters posit.

That’s the conclusion from a new report issued Tuesday jointly by Gallup and the U.S. Council on Competitiveness, which argues that despite a low unemployment rate and a record-setting stock market “there is a pervasive sense that the economy is not working, as documented in Gallup survey data and many anecdotal media accounts.”

The reason? The report’s author, Gallup Senior Economist Jonathan Rothwell, argues that the most obvious culprit is a slowdown in productivity growth. What economists call “productivity” is merely the amount of output a worker can produce in a given period of time. Without growth in productivity, it’s impossible for employers to bestow consistent wage increases on their workers, and it’s the lack of productivity growth of late has helped cause the problem of slowly growing worker pay.

As you can see from the chart above, GDP per capita growth has been on the decline steadily for a generation, and productivity growth is well below the glory days of the three decades following World War Two. The decline in per capita output growth defies the notion that we are engaged in an economic recovery at all, the author reasons, and Rothwell suggests that we are actually still mired in a crisis that urgently needs attention.

Rothwell argues that if we can figure out how to reverse the decrease in productivity growth, this will lead to higher GDP per capita growth and therefore relieve the frustrations that a slow-growing standard of living have engendered in the American electorate.


Rothwell isn’t the first economist to raise this point—earlier this year, Northwestern University economist Robert Gordon published The Rise and Fall of American Growth, in which he argued that the slowdown in productivity growth is the natural result of the fitful nature of technological change. The outstanding productivity growth of the post-war period and in earlier periods of American history, Gordon argues, sprang from industrial revolutions like the invention of indoor plumbing and the creation of the electrical grid. But such revolutionary inventions cannot be counted on to continue indefinitely, and absent them, we should expect to revert more closely to the anemic per capita growth rates seen through most of human history.

While Rothwell admires Gordon’s identification of the problem, he disagrees with Gordon’s pessimism. “In contrast with Gordon, this report makes the case that political barriers are a primary reason for wilting growth,” Rothwell writes. “Such barriers may be holding back the efficient diffusion and adaptation of already existing ideas or technologies, such as IT in healthcare administration.” He continues:

The macroeconomist Martin Baily has taken a similar view of the productivity slowdown in work closely related to this project. Baily has argued that regulatory inefficiencies and weak competition in education and healthcare have held back productivity gains. An anticompetitive patent system is also a problem, particularly with respect to software.

Rothwell goes on to argue that regulatory and tax reform is the main culprit for America’s economic woes, and that the healthcare, housing, and education industries have been particularly harmed by the government. He points to statistics showing that despite rapidly rising costs in all three of these industries, the quality of the products and services offered has stagnated.

Indeed, there are many reasons to believe that these industries are over-regulated, or at least not regulated in a way that puts economic growth first. The housing industry, for instance, deals with numerous regulations on the local, state and federal level, many of which are aimed at maintaining high home values, rather than making housing cheap for those who can’t already afford it. There are numerous statistics that point to the inefficiency of primary and secondary education in America, while the cost of post-secondary education has been spiraling out of control. And healthcare costs continue to rise rapidly, even as Obamacare reforms have added another layer of complex rules to an already highly-regulated sector.

But Rothwell does not do the work that would prove that it’s over-regulation that is the main culprit of slow productivity growth, as opposed to other causes. When it comes to healthcare and education, for instance, there are plenty of examples of wealthy countries that provide these services more efficiently than America does, but not because they have less government involvement in those industries. The German government for pays for its students to get a college degree at the low cost of $32,000 per degree per pupil. It achieves this efficiency by paying professors less and requiring class sizes far larger than Americans are accustomed to, and can do it because the government is a monopsony (that is, a “single payer”) purchaser of higher-education services.

When it comes to healthcare, the U.S. spends far more as a share of GDP than other wealthy countries, almost all of whom achieve lower costs through far greater government involvement in the healthcare system. But the solution of shifting to a single-payer healthcare system like Canada’s is not addressed in the report.

The U.S. Council on Competitiveness, which commissioned Gallup to author the report on a pro bono basis, draws its membership from America’s top CEOs. Given the ideological orientation of these folks, it may not be surprising that this report does not court greater government involvement in the economy. This doesn’t mean that the report doesn’t have anything to offer in the debate over productivity growth. There is much to be said for efforts to reduce zoning laws in order to make housing cheaper, or to lessen the burdens placed on teachers by the federal government. But this sort of regulatory reform is probably only part of the solution. Other countries have had success keeping costs down for public goods like education with simple strategies like price controls and strict regulations.

Furthermore, we should not so easily dismiss an hypothesis like Gordon’s which states that we should not expect to return to the outstanding growth rates of the decades after World War Two. Some problems are very difficult to solve, and others aren’t solvable at all. For instance, the economy of 1950 was nearly bereft of environmental regulations, so Americans of that time weren’t paying the costs of the pollution they were creating. It may be foolhardy to believe we can achieve those levels of growth without creating unacceptable levels of environmental degradation.

Another example of the pitfalls of Rothwell’s optimism is President George W. Bush’s No Child Left Behind program. It was Bush’s attempt to bring market forces to public education, by tying incentives to student test performance, that has created the environment of over-testing and a morale-killing lack of teacher freedom that Rothwell argues is stifling productivity growth in education today. Again, it may just be that there is no solution to slow productivity growth in this industry, and that attempts to ignore this reality will cause more harm than good.


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