With the housing decline beginning to hurt job growth in the rest of the economy, pressure is building on Fed Chairman Bernanke to cut interest rates fast and sharply. One key metric Bernanke should be looking at as he ponders when and how much to cut is productivity. Of all the measures of innovation, productivity growth is probably the most all-encompassing. And that measure, productivity growth, is down sharply. Over the past decade, nonfarm productivity growth averaged a very strong 2.6% but over the past year that rate has fallen to just 0.9%. This takes us back to the dreadful 70s and 80s, way before the tech and internet boom of the 90s.
We have to begin to understand what is behind this sudden decline in productivity growth and what it means for innovation. Have companies begun to scale back their investments in innovation? Are we using certain kinds of innovation, such as social networks, in ways that don’t boost our productivity—but reduce it? (Are we blah-blahing ourselves into poverty?) Are we spending more hours on phones to India dealing with IT problems because of outsourcing?
Or is it simply that companies are cutting back on their technology, R&D, consumer anthropology and other forms of innovation spending? One metric that tracks overall company investment is ad spending. When ad spending declines, if often means that companies are cutting back on their overall spending for the future. And ad spending is down 0.3% for 2008. This was the first time since 2001 that ad spending fell for two straight quarters. That’s ominous because that’s when the internet bubble burst and investment for all kinds of technology dried up for two or three years.
I don’t know the answers but the Fed needs to get a grip on them. Innovation is key to economic growth and if it falters, as it may be doing right now, it will hurt deeply.
As for cutting rates, the sooner the better.