Should We Be Worried About Productivity Trends?

by Sandile Hlatshwayo and Michael Spence

Sandile Hlatshwayo recently received her PhD in Economics from the University of California at Berkeley and will join the International Monetary Fund in the fall. Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution.

MILAN – Economists concern themselves not only with addressing difficult questions thoughtfully, but also with formulating the questions themselves. Sometimes, rethinking those questions can hold the key to finding the answers we need.

Consider the productivity debate. Economists trying to explain the apparent structural slowdown in productivity growth have been asking the following question: Where is the missing increase? Their response covers concerns about measurement, structural shifts in the labor market, a potential paucity of investment opportunities, productivity-diluting technological innovations, and technology-driven skills mismatches.

But it may also be useful to consider a more fundamental question: How much productivity growth do we really want, and at what cost?

There is no doubt that productivity growth is desirable. It is a primary driver of GDP growth (especially in countries where labor-force growth is slowing) and income gains. Strong GDP growth and rising incomes can then support the fulfillment of fundamental human needs and desires.

This link is particularly obvious in developing countries, where economic expansion and rising incomes are preconditions for poverty reduction and improvements in health and education. But the link between aggregate growth and individual welfare is no less visible in advanced countries – particularly those now struggling with slow growth, high unemployment, output gaps, debt overhangs, misaligned exchange rates, and structural rigidities.

But this does not mean that policymakers’ primary goal should be more productivity growth. Societies – including governments and individuals – care about a range of things, from health care and security to fairness and freedom. Inasmuch as productivity growth – and, in turn, GDP and income growth – advances these societal objectives, it is highly desirable.

There is, however, a tendency among economists and policymakers to overemphasize such market-related measures of performance, while overlooking the reason why that performance matters: human wellbeing. Efforts to implement a more comprehensive framework for assessing economic performance, one that reflects social needs and desires, have been largely unsuccessful.

In order to determine how much productivity growth we want, we need to take a broader view, one that enables us to decide how best to allocate society’s limited resources, especially its most valuable human resources. Such a perspective should recognize the possibility that market-related measures, particularly real (inflation-adjusted) income growth, may no longer be as important as they were in the past. And it must account for a society’s priorities, revealed in the ways in which its members use their resources.

Health-related discoveries and advances, for example, have brought massive societal benefits since World War II: increased longevity and reduced child mortality and morbidity, not just higher productivity and GDP. That is why the government of, say, the United States invests so much in medical research: the National Institutes of Health alone has an annual budget of $32 billion with which to fund infrastructure and research projects that employ a subset of the country’s greatest scientific talent. Similarly, the National Science Foundation and the scientific research arm of the US Department of Energy receive a combined total of about $12 billion per year, which they use to advance a wide variety of goals in engineering, energy efficiency, and green energy, and the natural and social sciences.

The economic return on public investment is even more difficult to calculate for security-related spending, where the total resources allocated to enhancing it and the effectiveness of those resources may be unknowable. But there is little doubt that security has a powerful claim on people’s wellbeing and thus on resource allocation.

In some cases, people’s desires may actually clash with the goal of improving productivity. Social media, for example, has often been derided as a feeble or even negative contributor to productivity. But productivity is not the point of social media. What people value about it is the connectivity, interaction, communication, and diversion that it enables.

In fact, for many individuals, particularly in wealthier countries, the top priority is not simply becoming richer, but rather living a richer life, and it is toward the latter goal that they will channel their time, income, and creativity. As societies become richer, the relative value placed on different dimensions of life may shift.

Societies’ allocation of resources will imprecisely but persistently follow these shifts. This is especially true when it comes to human resources, but public-sector resources also tend to respond to the same preferences and values over the longer term, regardless of the imperfections in our mechanisms of social choice.

This kind of evolution is not unique to high-income countries. China has reached – or perhaps passed – the stage during which a laser-like focus on productivity and GDP growth corresponds with ordinary citizens’ sense of wellbeing. As a result, China’s resources are increasingly being redeployed toward a more balanced portfolio that still includes growth, but adds environmental protection, social welfare, security, and innovation in a wide range of fields that overlap only partly with productivity and income growth.

All of this suggests that a substantial share of the decline in productivity growth may not be the result of some deep problem with resource allocation or some consequence of exogenous technological innovation cycles over which we have little control. Rather, it could reflect a natural shift in priorities to other dimensions of wellbeing.

This shift is not without its risks. Without productivity growth, the incomes of those at the lower end of the distribution will likely remain flat, exacerbating inequality and, as we have been seeing lately, jeopardizing social and political stability. Given this, governments should devote resources to reducing inequality, regardless of the shifting preferences of the average citizen.

Societies could, we have little doubt, elevate productivity and income growth substantially, if they managed to redeploy their resources entirely in that direction. But whether bucking revealed preferences embedded in private and public investment choices would make us individually and collectively “better off” is dubious, at best. More likely, it is simply not true.


Sandile Hlatshwayo recently received her PhD in Economics from the University of California at Berkeley and will join the International Monetary Fund in the fall. Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution.

Copyright: Project Syndicate, 2017.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Added 12.07.2018
The cabinet members who resigned this week apparently feared that politics is taking May toward a “soft Brexit,” their worst of all possible worlds........“soft Brexit,” maintains the status quo, more or less, letting Europeans freely circulate into British labor markets and allowing European firms to operate easily in the UK. The problem with “soft Brexit” is that it raises questions about why the UK is leaving at all, since it will still have the same obligations to Europe as before, it just won’t have a voice when the remaining 27 members of the European Union meet to make decisions.
Added 12.07.2018
One study on the 2010 World Cup found that there was a 37.5% rise in admission rates across 15 accident and emergency departments on England match days........Examining reports of domestic abuse in Lancashire (a county of approximately 1.5m people in Northern England), across the 2002, 2006 and 2010 World Cup tournaments, we discovered a 26% increase in reports of domestic abuse when England won or drew, and a 38% increase when England lost. Reports were also more frequent on weekends, and reached their peak when England exited the tournament.
Added 10.07.2018
If, back in the 1980s and 1990s, the US government, rather than arguing for Chinese economic opening, had prohibited any US company from investing there, China’s rise would have been significantly delayed, though not permanently prevented. Because that did not happen, China’s rise is now self-sustaining. A huge and increasingly affluent domestic market will make exports less vital to growth.
Added 10.07.2018
Comparing today’s demagogues with Adolf Hitler is almost always unwise. Such alarmism tends to trivialize the actual horrors of the Nazi regime, and distracts attention from our own political problems. But if alarmism is counterproductive, the question remains: At what point are democracies truly in danger? What was unimaginable only a few years ago – a US president insulting democratic allies and praising dictators, or calling the free press “enemies of the people,” or locking up refugees and taking away their children – has become almost normal now. When will it be too late to sound the alarm?
Added 09.07.2018
In view of such actions, expectations for Trump’s behavior at the upcoming summit have gone from prickly to dangerous. The sense of foreboding has been heightened by the announcement that, just four days after the summit ends, Trump will meet with Russian President Vladimir Putin, in Helsinki. The nightmare scenario is easy to imagine: Trump lays bare NATO’s fractures, including by questioning mutual defense, before selling his allies down the river by publicly embracing Putin. But this does not need to be the outcome.
Added 09.07.2018
After 2027 (or maybe even 2025, only 7 years from now), the number of EVs will rapidly accelerate, as virtually all new vehicles bought will be electric (an effect of rapidly falling battery and other component costs and of the fuel for electric cars being essentially free; you can power one off your rooftop solar array).
Added 03.07.2018
Most pundits interpret Trump’s outbursts as playing to his political base, or preening for the cameras, or blustering for the sake of striking future deals. We take a different view. In line with many of America’s renowned mental-health experts, we believe that Trump suffers from several psychological pathologies that render him a clear and present danger to the world.
Added 03.07.2018
In the United Kingdom, Brexit looms large, with everyone from government ministers to tabloid newspapers frothing daily about the deal that will be struck with the European Union and the effects that it will have. But the EU faces too many pressing challenges to be obsessing about Britain. The UK’s concern is understandable: evidence is mounting of the likely damage a departure from the single market and customs union will do to the UK economy. According to new research from the Centre for European Reform, the UK economy is already 2.1% smaller than it would have been had voters chosen to remain. The hit to public finances totals £440 million ($579 million) per week.
Added 26.06.2018
Nowadays, Britain’s words and actions on the world stage are so at odds with its values that one must wonder what has happened to the country. Since the June 2016 Brexit referendum, British foreign policy seems to have all but collapsed – and even to have disowned its past and its governing ideas. Worse, this has coincided with the emergence of US President Donald Trump’s erratic administration, which is pursuing goals that are completely detached from those of Britain – and of Europe generally. 
Added 26.06.2018
With each passing day, it becomes increasingly evident that US President Donald Trump’s administration cares less about economics and more about the aggressive exercise of political power. This is obviously a source of enormous frustration for those of us who practice the art and science of economics. But by now, the verdict is self-evident: Trump and his team continue to flaunt virtually every principle of conventional economics.
Added 26.06.2018
The sights and sounds of Central American children being ripped from their parents by US Border Patrol officers have, by now, spread across the globe. The experience has been traumatizing to its victims and deeply painful to watch. It has also done incalculable damage to the very idea of America. This is June when we are supposed to be celebrating "Immigrant Heritage Month". Each year, I have taken this opportunity to recall my family's immigrant story - the opportunity and freedom they sought, the hardships they endured, and the remarkable progress they made in just one generation. 
Added 24.06.2018
State terrorism comes in many forms, but one of its most cruel and revolting expressions is when it is aimed at children. Even though U.S. President Donald Trump backed down in the face of a scathing political and public outcry and ended his administration’s policy of separating migrant children from their parents, make no mistake: His actions were and remain a form of terrorism.
Added 22.06.2018
It is now clear that the twenty-first century is ushering in a new world order. As uncertainty and instability associated with that process spread around the globe, the West has responded with either timidity or nostalgia for older forms of nationalism that failed in the past and certainly will not work now. Even to the most inveterate optimist, the G7 summit in Quebec earlier this month was proof that the geopolitical West is breaking up and losing its global significance, and that the great destroyer of that American-created and American-led order is none other than the US president. To be sure, Donald Trump is more a symptom than a cause of the West’s disintegration. But he is accelerating the process dramatically.
Added 20.06.2018
Sessions quoted a line written by the apostle Paul to a small community of Christians living in Rome around 55AD to defend the Department of Justice’s approach. He said: "I would cite you to the Apostle Paul and his clear and wise command in Romans 13, to obey the laws of the government because God has ordained them for the purpose of order." Sessions used the Bible because one of the most vocal opponents of the crackdown on asylum cases has been the Catholic Church. It’s no surprise that Sessions appealed to Romans chapter 13 verse 1 in response: not only did he hope to undermine Catholic authority by using the Bible against them, he cited a statement so broad that one might use it to defend anything a government does, good or bad. Picture below St Paul writing his epistles, by Valentin de Boulogne, via Wikimedia Commons.
Added 19.06.2018
 

I find it exceptionally irritating when I hear liberals worry about whether Israel will be able to remain a "Jewish and Democratic State" if it retains control of occupied Palestinian lands.

Added 18.06.2018
Daniel Wagner: "My prediction Korean War will be formally ended, the peninsula will be denuclearised, and a lasting peace will be the result."
Added 14.06.2018
Extract: PiS [ the ruling Law and Justice party] has established the most significant addition to the Polish social safety net since 1989: the Family 500+ program. Launched in 2016, Family 500+ embodies the nationalism, traditional family values, and social consciousness that the PiS seeks to promote. The program pays families 500 złoty ($144) per month to provide care for a second or subsequent child...........The program has been enormously popular. Some 2.4 million families took advantage of it in the first two years. The benefit, equivalent to 40% of the minimum wage, has almost wiped out extreme poverty for children in Poland, reducing it by an estimated 70-80%........... Liberal pro-European politicians and policymakers are not convinced. They complain that such a generous family benefit will weaken work incentives and blow up the government budget. But initial evidence suggests that Family 500+ has actually increased economic activity. It has also reversed the post-communist decline in fertility, increased wages (particularly for women), and enabled families to buy school materials, take vacations, buy more clothes for their kids, and rely less on high-priced credit for basic household needs. And, thanks to rapid economic growth, the government deficit has steadily fallen, not grown.
Added 12.06.2018
The depths of hypocrisy of the Republican Party in supporting Trump’s meeting with the North Korean dictator in Singapore are hard to plumb. This is a party whose leading members adopted the Ostrich Foreign Policy Principle for decades. If you don’t like a country’s government or political and economic system, pretend it does not exist.
Added 12.06.2018
US Defense Secretary Jim Mattis has spoken out against China’s strategy of “intimidation and coercion” in the South China Sea, including the deployment of anti-ship missiles, surface-to-air missiles, and electronic jammers, and, more recently, the landing of nuclear-capable bomber aircraft at Woody Island. There are, Mattis warned, “consequences to China ignoring the international community.” But what consequences?
Added 12.06.2018
With a general election approaching in September, Swedish voters are being warned that now it’s their turn to be targeted by Russian interference in the democratic process. According to Sweden’s Civil Contingencies Agency (MSB), which is leading the country’s efforts to counter foreign-influence operations, such interference is very likely, and citizens should be on the lookout for disinformation and fake news.