To Break Out of National Productivity Rut, ITIF Calls for Sea Change in Economic Policy

WASHINGTON—Against the backdrop of a stubbornly bleak productivity picture in the United States, the Information Technology and Innovation Foundation (ITIF), a leading technology policy think tank, today released a new e-book (also available as PDF) arguing for a sea change in thinking that would make productivity growth the principal goal of economic policy.

Bucking the received wisdom of conventional economics, the book explains why policymakers in the United States and other advanced nations should adopt comprehensive productivity strategies, and it provides a detailed roadmap for them to accelerate productivity by 1 percent or more. In the United States, ITIF estimates such an increase would make the economy $2.3 trillion bigger than it is otherwise projected to be in 10 years while shrinking the federal budget deficit by more than $400 billion.

“Economists all agree that productivity is the key to improving people’s living standards,” said ITIF President Robert D. Atkinson, the book’s author. “But few believe governments can do much about it. They are wrong to be so skeptical. Policymakers can and must craft national strategies that accelerate productivity. In fact, this should be the principal goal of economic policy. Today’s announcement of a 1 percent drop in productivity for the first quarter of 2016 underscores that America is in a deep productivity rut. It is past time that we focus on getting out of it.”

Atkinson’s book upends a heated series of debates among economists about the future prospects for productivity growth and about its relative benefits or harms for workers. The book rejects the views of both productivity pessimists such as Northwestern University’s Robert Gordon and productivity Pollyannas such as MIT’s Erik Brynjolfsson, arguing instead that the United States could enjoy a significant pickup in productivity growth—but only if it adopts a coherent national productivity strategy. The book also marshals data to refute the notion that such progress would come at workers’ expense.

“All too often, productivity is portrayed as a boogeyman that kills jobs, undermines incomes, and exacerbates inequality,” said Atkinson. “These views are not just utterly wrong, but also dangerous, because they can undermine political support for putting the productivity pedal to the metal.”

The book explains that a core reason productivity has lagged in the United States is that industries have failed to adopt the best new tools in the best possible ways. Neoclassical economic theory holds that organizations have plenty of incentives to boost productivity on their own, and government should not proactively encourage greater productivity because it would only distort the marketplace. But Atkinson refutes this notion. Rather than conceiving of economies as large markets in which self-interested actors respond to price signals, Atkinson argues it is more accurate to think of economies as large, integrated enterprises that work best when countries enact comprehensive productivity strategies that, among other things, support activities that individual enterprises cannot or will not undertake effectively on their own.

Atkinson writes that to boost productivity nations need to get beyond the passive, conventional advice that governments should merely establish the right market frameworks and instead embrace an array of policies that promote greater productivity in all organizations. He outlines a detailed framework to guide policymakers as they craft national productivity strategies. It includes the following elements:

• Making higher productivity the principal goal of economic policy;
• Eliminating preferences for small firms over larger firms, because small businesses are generally less productive;
• Increasing capital investment by raising the price of labor (with higher minimum wages, less low-skill immigration, etc.) and lowering the price of capital equipment (with investment tax credits, etc.);
• Reforming corporate governance to provide better incentives for investing in long-term capital projects;
• Expanding science and technology research targeted specifically toward the development of productivity-enhancing and labor-displacing technologies;
• Analyzing opportunities and constraints facing every major industry, and developing sector-specific productivity policies; and
• Developing a dedicated productivity agency to develop and coordinate a sophisticated productivity agenda.

“Without productivity growth, sustained income growth is impossible,” Atkinson concluded. “We have to go beyond the standard counsel from conventional economists that it is enough for policymakers simply to get market conditions and factor inputs right. It is not. Nations need smart, analysis-based productivity strategies, and they must find the political will and bureaucratic means to implement them effectively. If the United States does this right, then it could benefit from a much-needed acceleration in productivity growth to the tune of $2.3 trillion more in GDP by 2026.”

Read the e-book (also available as PDF).

Read the executive summary.

See highlights at a glance.