The most important goal for economic policy is the long-term increase in productivity and incomes. Achieving this requires an investment-driven process targeting several critical categories of assets that drive productivity growth and wages. Unfortunately, what passes for U.S. growth policy is far from investment oriented. Instead, policymakers rely almost exclusively and myopically on macro stabilization tools, especially monetary policy, in large part because they continue to rely on simplistic and incomplete economic models that misrepresent modern technology-based growth. The result has been slow growth in real incomes since globalization has greatly increased worldwide competitiveness. America needs a four-point investment strategy designed to increase long-term productivity growth. This is the only way to achieve steady increases in the standard of living.
In spite of the United States’ historically large application of monetary policy since the Great Recession in the form of unprecedented purchases of U.S. Treasury and mortgage-backed securities, coupled with interest rates near zero, acceptable rates of economic growth have not resumed. These gargantuan efforts have done little to boost productivity.
The major reason for such poor economic results is government’s excessive and single-minded reliance by government on monetary policies. Americans have a near collective obsession with the day-to-day actions of the Federal Reserve Bank; however, its role is limited and simple: stabilizing the business cycle and ensuring that actual growth is not too far from real growth potential. While providing a more stable economic environment can have a positive effect on short-term investment and consumption, monetary and, in certain ways, fiscal stabilization tools cannot change long-term rates of economic growth—arguments by both liberals and conservatives to the contrary. In an intensely competitive global economy, sustained high rates of productivity and income growth require persistent investment, specifically in areas that drive productivity advances. In fact, virtually all U.S. economic growth problems can be traced to secular underinvestment in the four major categories of economic assets:
- Technology innovation: the long-term driver of productivity growth;
- Technology-based capital investment: in particular, hardware and software that embody most new technology and thereby enable its productive use;
- Human capital: skilled labor capable of using the new hardware and software and associated techniques; and
- Infrastructure, including physical and digital: necessary to efficiently develop and use modern complex technology systems.
The first category, technological innovation, is the basis for long-term productivity growth, and the other three enable its development and delivery to markets where the resulting productivity advances have their impact on income growth. Unfortunately, multiple barriers within the U.S. economy prevent adequate rates of investment in these four asset categories; in fact, in a number of ways, U.S. policy harms, rather than enables, increases in investment in these four areas. It is time for economists and policymakers to recognize that America needs a new economic growth strategy, grounded not in fiscal and monetary policy, but in policies explicitly focused on spurring technological innovation. This means tax and spending policies need to be explicitly realigned to promote public and private investment in these four key areas.