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Op-Ed: Has the American economy lost its magic?

By Jan Zilinsky (People's Daily Online)    10:34, August 11, 2016

Economic recovery in the United States after the financial crisis has entailed considerable pain. Although the growth of the economy never really regained momentum after the financial crisis, the modest expansion has led to a consensus that things are back to normal. The U.S. economy may soon receive a “stamp of approval” from the Federal Reserve – when the central bank raises interest rates, it will show its confidence that American firms are finally meeting their potential.

But even if much of the economy has healed, a more skeptical narrative is emerging. Latest data suggest that the U.S. economy is less productive now than it was last year. Has the last recession drained the innovative spirit of American companies? If the dynamism for past decades is really lost, economic and social consequences could be severe.

Productivity growth means that workers are able to produce more goods and services. Overall, economic performance hinges on capital (tools, buildings, and machines), the total number of hours worked by employees (as well as their skills), and the available technology. When we speak of innovation and productivity growth, we mean that employees generate more output even if their skills have remained the same. (The fact that the U.S. needs to improve its education system is a separate issue.)

The “productivity puzzle” is that, according to official statistics, workers are not becoming more productive, despite ongoing research and introduction of new technologies. A popular explanation of this mystery is that recent technological innovations either do not make workers more efficient, or they contribute to higher productivity in ways that are difficult to measure. The question is whether innovations can be incorporated in the production process. Given that many of the new digital services allow people to enjoy leisure activities more cheaply, the answer is far from obvious.

When communication technologies improve, it is easier to share photographs, stream movies, and connect with other people through social media. But as various types of transactions become smoother thanks to faster data flows, they do not necessarily translate into higher output. It is even possible to imagine that workers in some sectors produce less than they used to because work-related tasks are interrupted by incessant emails.

Alternatively, it is conceivable that the quality of services has improved, but these advances are not appropriately reflected in prices. That would mean that productivity is underestimated. If suppliers can build better relationships with their clients thanks to cheap mobile phones or cloud services, then the satisfaction created from better partnerships is not measured in official statistics (unless the supplier chooses to raise prices).

Besides, some companies and people are even providing services at no charge. Many on-line tools and website do not charge their customers, relying on advertising or data collection for revenues instead. An optimistic observer would note that innovation is not as slow as it looks, because many things that we value are simply not captured by the official statistics, due to their “lack of a price tag.”

And yet, a pessimistic analyst could counter the sanguine story with several admonitory points. Since 2001, the average growth of the U.S. economy was less than 2% per year, after adjusting for inflation. The job market has been unsatisfactory for years. Many people became so discouraged in the process of their search for jobs that they dropped out of the labor force completely. When they stopped looking for jobs, they are no longer counted as “unemployed”. Therefore, the official unemployment rate masks and underestimates the total number of people who want to work but are unable to find employment.

The state of the labor market, as well as the lackluster productivity trends, suggest that the rate of economic progress has slowed down. But smart public policy could reverse these unenviable tendencies. Various growth-enhancing reforms are, in principle, available.

Policy makers could raise the odds of an economic revival by enacting tax reform, investing in infrastructure, overhauling the immigration system, or carrying out an ambitious trade policy. There was some encouraging news last year when the research and development tax credit was made permanent, but research could be supported further by more generous grants, for example for medical breakthroughs.

Moreover, the U.S. has neglected the maintenance of both its physical and digital infrastructure. A recent assessment from the International Monetary Fund warned that data infrastructure in the U.S. still contains too many blind spots, arguing that “the comprehensive information needed to fully assess and understand financial stability risks” is lacking. These issues are directly connected to productivity, because roads that are not maintained impede travel and trade. It should also be clear that countries waste valuable resources when they rush to do emergency repairs due to insufficient maintenance of productive assets.

Finally, there is ample room to mend a variety of aspects of governance. It would be useful if political representatives refrained from creating periods of fiscal uncertainty by delaying budgets and appropriation bills. Multiple worthy reforms have been thwarted by political gridlock in recent years. While sensible and predictable public policy is desirable regardless of the current state of the business cycle, good governance would be particularly valuable today, so that people’s creativity can be channeled into greater productivity and new inventions. 

The author is a research analysts at the Peterson Institute for International Economics, based in Washington, D.C.

 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Editor: Wu Chengliang,Bianji)

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