Observation Deck

The U.S. Economy Needs More Productivity, Not Jobs

The U.S. Economy Needs More Productivity, Not Jobs

Ask business leaders what President-elect Donald Trump’s top economic priority should be, and you’ll get an array of predictable answers: Cut business taxes. Reduce the debt. Reform trade deals. Jeffrey Immelt, CEO of General Electric Co., has a different response. “We have to find ways to raise productivity,” Immelt told an audience at a September conference in New York. Otherwise, he warned, America could face years of below-trend growth with all the associated problems: rising debt, falling living standards, and so on. Conversely, GE economists estimate that if the world boosted industrial productivity by just 1 percent, it could add $15 trillion—yes, trillion—to the global gross domestic product over the next 15 years.

At first glance, Immelt’s answer seems peculiar. It’s easy to feel that hyper-efficiency is ubiquitous. According to a McKinsey study, digitization influences up to 98 percent of the U.S. economy—thanks to the 87 percent of adults who use the internet, for example, and the 64 percent who have smartphones. The annual growth rate of e-commerce is dependably robust, vacillating between 15 and 17 percent since 2010.

GE is the poster child of the productivity gains many people associate with the U.S. economy. A half-century ago, its factories had human assembly lines. Today, it puts robots to work on a massive scale. This year alone, it anticipates making $500 million in productivity gains by applying digital technology to its operations. Looking ahead, Immelt expects 3-D printing to produce about a fifth of GE’s industrial output in the next two decades, raising productivity even further.

Yet looks can be deceiving. Consider the official data on economic activity produced per hour of labor in the United States. Starting in the 1950s, the average annual rate of productivity growth was 2.3 percent, rising above 4 percent in some years. As recently as the early 21st century, it topped 3 percent. Over the past decade, however, the figure has tumbled. The average of annual rates from the five years leading up to 2016—the sort of rolling measurement statisticians consider to be the most accurate indication of an underlying trend—was a mere 0.4 percent. The matter is provoking anxiety at the Federal Reserve, where Chair Janet Yellen has described the data as “puzzling” and “disappointing.”

This is not just a made-in-America phenomenon, however. Productivity rates have been falling sharply around the world. A survey of 30 rich member-states of the Organisation for Economic Co-operation and Development (OECD) found that 29 had recorded slowdowns between 2005 and 2014. The decline has been particularly striking in the United Kingdom, which has had barely any measured increase in output per worker for almost a decade. As in Washington, U.K. economic experts freely admit that they are uncertain about what’s going on.

Some pundits have suggested that the data are just wrong. Charlie Bean, a former deputy governor of the Bank of England, says statisticians could be failing to count all of the productive activity in cyberspace because keeping track of it is so difficult. In a similar vein, they might not be measuring all the output of free services, such as apps. Or maybe last decade’s credit bubble distorted the data: It artificially inflated the value of financial services, making today’s economy look smaller by comparison.

Other experts posit that the numbers are correct—companies are just failing to invest in new technologies or to generate smart ideas. More optimistic sorts, such as economists Andrew McAfee and Erik Brynjolfsson at the Massachusetts Institute of Technology, suggest that there is a time-lag effect. Companies are still investing and creating, the argument goes, but it can take years to bring important innovations to scale.

Another explanation, however, is gaining ground at the Fed and elsewhere: that America suffers from a multi speed economy. This theory contends that some companies, such as Silicon Valley powerhouses like Google and forward-thinking, competitive manufacturers like GE, are becoming more productive and tend to grab public attention. All the rest, though, are dragging down the productivity growth rate.

It’s difficult to measure this divergence. Researchers at the Bank of England are parsing micro-level data from companies, collected by the OECD, to see if they can quantify the trend. Their early, informal estimates suggest that only around 20 percent of all companies have generated most productivity gains in recent years and that they tend to be manufacturers. Meanwhile, data collected by the U.S. Bureau of Labor Statistics indicate that American manufacturers’ productivity rose by 1.8 percent annually between 2007 and 2015, 40 percent higher than the national average. In the previous decade, the gap was even more stark: Productivity in manufacturing rose 4.7 percent between 2000 and 2007, and just 2.6 percent among businesses overall. The takeaway is that responsibility for poor efficiency lies not with widget-makers or technology giants but with health care providers, educational institutions, food services, and other sectors.

If this last explanation is correct—and I think it almost certainly is—there are huge implications for Trump’s economic priorities. During the campaign, there was extensive debate about how to enable American industry to flourish on the world stage. A hot topic was whether domestic jobs need “protection” in the form of trade barriers and other measures. Seen through the lens of productivity, however, this is clearly the wrong approach to expanding the economy. Politicians ought to be talking about where gains could be made by introducing technological innovations, streamlining workflows, and cutting bureaucratic fat in sluggish sectors, which tend to be those less exposed to international trade.

Admittedly, these priorities aren’t sexy. They don’t generate easy political sound bites, nor are they tailor-made for exciting photo-ops or jet-setting trips to negotiate international deals. Yet they could stoke a revolution. As Yellen has said, “Productivity growth is the key determinant of improvements in living standards.” If Trump wants to leave an indelible mark on the U.S. economy, unleashing more dynamism and efficiency would be the place to start. Although it’s exciting and commendable that GE has robots manning factory floors and 3-D printing defining future business strategies, the economy won’t appreciate the full potential of these technologies until they reach classrooms, shops, offices, and, yes, government agencies. Only then will productivity rise to the level where the smartphone generation already imagines it to be.

A version of this article originally appeared in the November/December 2016 issue of FP magazine.

Illustration by Matthew Hollister