Ken Rogoff is absolutely right that the U.S. has to concern itself more with productivity, if for no other reason than it’s the key to reducing the impact of the baby boom retirement on future worker incomes and government finances. But it’s one thing to say this and quite another to do it, for Washington largely ignores productivity and one of the key reasons is because conventional economists tell them to.

Conventional economists actually provide little in the way of helpful advice on productivity. In fact, they are more likely than not to scold any policy maker so bold as to suggest we need a national productivity policy. Neoclassical economist Alan Blinder explains that “Nothing – repeat, nothing – that economists know about growth gives us a recipe for adding a percentage point or more to the nation’s growth rate on a sustained basis. Much as we might wish otherwise, it just isn’t so.” Paul Krugman, offers the same counsel, pronouncing: “Productivity growth is the single most important factor affecting our economic well‑being. But it is not a policy issue, because we are not going to do anything about it.” It’s not just the neo-classical economists who counsel such passivity. Neo-Keynesians largely agree. As neo-Keynesian Frank Levy agrees, stating, “We cannot legislate the rate of productivity growth ... That is why equalizing institutions are so important.” These aren’t outliers. The dominant economic thinking embodied in neoclassical and neo-Keynesian economics gives short shrift to productivity and largely counsel policymakers to manage the business cycle, reduce allocation inefficiencies, and depending on their political orientation, support greater fairness. No wonder they call economics the dismal science.

Conventional neoclassical economists not only say that there is little to do about productivity, but even if government could have an impact the best way is to do nothing, since for them government intervention only distorts the workings of the free market, producing "allocation inefficiency." Nowhere does this constraint apply more than to tax policy. Whatever you do, goes the common refrain – so accepted that to challenge it is to be seen almost as a crank, – don’t make the tax code more complicated as we all know that it’s simplicity that drives growth. Moreover, if it involves spending (e.g., public investment), don’t, since that just increases the budget deficit, which we all know raises interest rates, which limits capital accumulation, which limits growth.

To the extent the neo-classical doctrine has any anything to say about a proactive role for the government in spurring productivity, they advise supporting what can be termed factor conditions that all firms can benefit from (e.g.,. free trade, better education, a good regulatory system, basic research).

Innovation economics (aka endogenous growth theory, evolutionary economics, neo-Schumpeterian economics) rejects views as at best simplistic, and at worst anti-growth. The evidence clearly shows that it is changes in organizations (e.g., business, government, non-profits) that drive productivity, with around 80 percent of productivity growth coming from organizations improving their own productivity and only about 20 percent coming from more productive organizations replacing less productive ones. So productivity is less about markets (which is what conventional economists study) and more about organizations (which is what innovation economists and business strategists study) and in particular how organizations use technology to drive productivity. Most conventional economists don’t bother to, as Nathan Rosenberg stated “look inside the black box” of actual innovation in actual organizations. . Yet it is in the black box that the keys to raising productivity and the keys to the right productivity policy will be found.

In this sense, the innovation economics literature is clear: allocation efficiency and capital accumulation are just not that important, and better factor conditions, while important, are not enough.

One can envision a host of policies that, while distorting allocation efficiency, also boost productive efficiency and dynamic efficiency. For example, the R&D tax credit “distorts” allocation efficiency. But it produces more innovation than the market would otherwise produce. But the innovation and productivity spurred by more R&D that the credit produces vastly exceeds any minor losses from “misallocation” of economic resources. Tax simplicity is actually anti-growth if it limits growth-enhancing tax incentives to spur more investment in research, next generation capital equipment, workforce skills, etc.).

Likewise, the neo-classical focus on capital accumulation as the key to growth is not borne out by the innovation economics literature which finds that as much as 90 percent of productivity growth is due to more innovation, not more capital. And it clearly shows that markets acting on their own will under-produce growth. In this case, public investment (both on the spending and tax incentive side), even if it raises budget deficits, will be drive productivity growth if its focused on activities that spur productivity (e.g., knowledge production, certain kinds of infrastructure, etc.).

Finally, the neoclassical notion that just getting factor conditions right is enough is clearly rebutted by studies of sectoral differences in productivity in nations. As former head of McKinsey Global Institutute, Bill Lewis showed in his excellent book “The Power of Productivity,” if factor conditions were the key, then there would not be dramatic differences in productivity in sectors (relative to global best practice) in particular nations. But there are, and these differences account for the lion’s share of productivity differences between nations. As a recent report from the McKinsey Global institute notes: “The report finds that the global competitiveness of industry sectors in countries such as Japan, Korea, and Finland vary immensely, despite the fact they all exist under the same macroeconomic policy rubric, noting that sectoral policy factors largely explain these differences in outcomes." It’s only policies that are grounded in deep sectoral understanding that can ultimately drive productivity effectively. But for most neo-classical economists, who a trained to understand price-mediated markets, but not organizations and industries, such a view is tantamount to the ultimate heresy: “Industrial policy”.

So yes, we need a stronger focus on productivity, but if it’s to be the right one, Washington has to give up on the notion that the only economic advice worth taking is from (conventional) economists. If we are to get productivity policy right, it’s time to bring in business scholars, technologies, innovation economists, regional planners and others who have grounding in the real world of organizations and industries.

Collapse

Ken Rogoff offers useful cautions about the monetary and fiscal policies that might lead the United States down a path toward a “lost decade” such as Japan suffered in the 1990s. However, in recommending steps to bolster U.S. productivity and growth, he pays too little attention to what should be a primary concern of Congress, the White House and business – global competitiveness.

Competitiveness is certainly the primary issue for the National Association of Manufacturers [NAM] and our members. Businesses today see a government that favors higher taxes, an ever-mounting regulatory burden, and restrictive energy policies that disadvantage U.S.-based companies.

This unwelcoming business climate discourages domestic investment and job creation. It tells growing businesses that they might be better off expanding in some other country.

The problem is that policymakers fail to recognize that there’s not one simple path or a single policy change that can by itself advance U.S. productivity and competitiveness. Unlike the elected leaders in the major economic powers of the European Union, the growing manufacturing giant of China, or aspiring manufacturing countries like India and Brazil, Congress fails to think strategically about competitiveness.

To succeed in today’s global economy, the United States must enact policies that enable manufacturers and other businesses to compete. What’s needed is a comprehensive approach to make manufacturing in the United States more competitive and more productive.

The NAM recently developed such a comprehensive approach, the NAM’s “Manufacturing Strategy for Jobs and a Competitive America.” It’s a multipart strategy that sets goals some might call ambitious, but we regard as essential for America’s continued economic vitality.

• The United States will be the best country in the world to headquarter a company. We want companies to be based in the United States.

• The United States will be the best country in the world to innovate, performing the bulk of a company’s global research and development.

• The United States will be a great place to manufacture, both to meet the needs of the American market and serve as an export platform for the world.

Manufacturers appreciate there are legitimate concerns about deflation or a Japanese-style lost decade, but believe focusing on fiscal and monetary policies alone fails to get the heart of the problem. If productivity and job-creation are the goals, then the emphasis must be on U.S. competitiveness. If we lag behind Europe, Asia or South America in competitiveness, then investment will slow, productivity will fall, and the United States will stagnate. You simply cannot separate competitiveness and productivity.

The NAM’s “Manufacturing Strategy for Jobs and a Competitive America” is available at www.nam.org/manufacturingstrategy .

Collapse