Searching for the Easy Ways to Raise Productivity
On Valentine’s Day, economist Kevin Grier quipped: “Roses are red. Pin one on your suit. America has eaten all the low-hanging fruit.” That pithy assertion is one of the most frightening propositions in the world today.
There might be a way for a modern society to function without economic growth. But we don’t want to have to be the generation that discovers what that is. Growth is essential to our way of life. It lowers unemployment. It makes people feel that they’re better off than their parents. It creates abundance that makes politics seem less like a zero-sum game, which helps to reduce conflict and create a peaceful society. And it undergirds the pension and financial systems upon which so much of our wealth depends.
In the long run, growth comes from productivity -- the ability to do as much or more with less. And productivity growth has been slowing in advanced countries since the mid-2000s:
Less-developed countries such as China and India are still catching up with the advanced nations, so global growth is still robust. But if the rich countries can’t push the frontiers of productivity, demand for the things China and India produce will stagnate and growth will slow. Even worse, rich countries will experience political unrest, as rising expectations are dashed and populist movements gain support. Developed-country governments should therefore be doing all they can to lift productivity.
That’s easier said than done. Productivity comes from the level of technology, the quality of government and the skills of the population -- three things that are notoriously hard to boost. As my Bloomberg View colleague Tyler Cowen showed in his 2011 book “The Great Stagnation,” many of the obvious steps have already been taken. Advanced countries already have universal public school, widespread college attendance, systems of research universities and national laboratories, and legal institutions like patent systems to encourage innovation. It’s not clear that increasing these even more would have a beneficial effect -- students might waste their most productive years in excessive schooling, patents might block more discoveries than they encourage, and so forth.
As for the quality of government, it’s not always clear how to make it better. The free-market enthusiasm of the 1980s and 1990s has given way to lowered expectations about the ability of tax cuts and privatization to increase growth. Deregulation is always a tempting possibility, but it’s hard to know which rules to go after, and blanket slashing of all regulation could cause a lot of harm to the environment, product quality and workers’ quality of life.
So Grier is right; the U.S., and its peers, really have done most of the obvious things to raise productivity. But a bit remains. Before countries go looking for ways to radically transform their economic and political systems, they should do the easy tasks that remain undone.
The first is to raise government spending on research. Even as the government has grown, federal spending on exploring new technology has stagnated in the U.S.:
In many research domains, increasing investments are needed in order to maintain the same rate of progress. But federal spending can also help open up entirely new fields, such as the early development of the internet and hydraulic fracturing to extract oil that was impossible to reach before.
Second, there are some types of regulations that are obviously detrimental to the economy. Occupational licensing is an example. An even worse offender is restrictive land use regulation by tech hubs. Cities such as San Francisco and Austin, Texas, are becoming more important to the national economy, but their governments often keep out newcomers with zoning, tedious development-approval processes and other legal barriers. The same is true of college towns such as Ann Arbor, Michigan, which could grow into regional tech hubs if they allowed more development. Intellectual property law is a third area that seems ripe for smart pro-growth reform.
Infrastructure repair is another obvious task, especially in the U.S. Before countries build new roads, bridges and pipes, they should repair the ones they have, since these support existing networks of economic activity. It’s easy to avoid the productivity loss from leaking pipes, falling bridges and potholed roads -- the government just needs to be willing to spend money to fix them before the problems get too bad.
But the biggest piece of low-hanging fruit might be skilled immigration. According to the best economic research available, skilled immigration raises the wages of native-born people in rich countries. A recent National Academy of Sciences report confirms:
Several studies have found a positive impact of skilled immigration on the wages and employment of both college- and non-college-educated natives. Such findings are consistent with the view that skilled immigrants are often complementary to native-born workers.
China and India, each with about four times the population of the U.S., have more than enough high-skilled immigrants to raise rich-country productivity without causing substantial brain drain. The U.S. and its peers should be focused on taking in more of these talented workers. Japan is already making moves in this direction, as are some European countries.
So there are still some pieces of low-hanging fruit left for rich countries to devour. Fortunately, Donald Trump's administration seems clued into a few of these, at least in principle. Trump has called for more infrastructure spending, more high-skilled immigration, more defense spending (some of which could be devoted to research) and deregulation. Whether these promises materialize, and whether Trump focuses on the right types of spending and regulation, remains to be seen.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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