Christine Benz: Hi, I'm Christine Benz for Morningstar.com, and I'm here at the Morningstar Institutional Conference. Joining me to discuss the topic of whether slowing productivity growth will weigh on the U.S. economy is Matthew Slaughter--he is a professor of international business at Dartmouth.
Matt, thank you so much for being here.
Matthew Slaughter: My pleasure.
Benz: In your presentation today, you spent a lot of time talking about productivity growth in the U.S., painting a pretty grim picture when you look at the data. Can you summarize the data on U.S. productivity growth?
Slaughter: Sure. The headline for productivity growth in the United Sates is it has slowed dramatically, especially in the past five years roughly. The U.S. Bureau of Labor Statistics tracks those data, and the main measure they look at is growth in productivity in the nonfarm business sector. And in the past five years running, the annual rate of growth of nonfarm labor productivity has been below 1%. In fact, the average across these five years has been a little under 0.5% each of those five years, and that is the slowest five-year stretch of productivity growth in the history of the BLS tracking these data over many decades. That really matters because productivity growth is at the heart of what drives growth in standards of living for the United States.
Benz: I want to talk a little bit more about that. But before we get into it, let's talk about what you think are the key factors driving that decline in productivity growth.
Slaughter: Great question. Economists know, on average, what the policies are in particular that can support productivity growth. It's things like allowing in a lot of high-skilled immigrants. They tend to be very innovative in terms of starting new companies, in terms of discovering new ideas through patents, and triggering job creation and new ideas among native-born workers that they are collaborating with in companies. It's things like having a competitive international business tax regime. It's things like making public investments in basic infrastructure--roads and bridges and IT infrastructure. It's our basic educational system as well. So, there is a constellation of policies that a lot of research has shown, over time, when they are done smartly, tend to raise the likelihood that companies and individuals in the private sector can really be innovative.
Benz: So, would you say that poor policy decisions have contributed to this slowdown that we've seen in productivity growth?
Slaughter: I would. There is still some academic research to be done on this given how new this slowdown is. But what's pretty clear in recent years--take international tax, for example--is that so many other countries around the world are making their tax policies competitive to try to attract and retain the investments in people, in research and development, and capital that these globally connected, very high-performance companies make, and the U.S. has had no change in our tax policies. Today, increasingly, we have one of the most high-complexity, high-burdened business tax codes of any country in the world, and that's making it harder for a lot of these globally connected companies to be more interested in making these kinds of investments in the United States.
Benz: Would you say that changes in the complexion of the U.S. economy have also contributed potentially to the slowdown in productivity?
Slaughter: That's a good question. We've got pockets of innovativeness in the U.S. economy, clearly. And I think the one in recent years that has been offsetting the aggregate numbers is the energy industry. The boom in energy production in the United States, especially in natural gas and oil, is one of these classic productivity booms that are terrific for creating new jobs, corporate profits, and income for people. It's been very concentrated in certain places in the United States; the obvious areas include Texas and North Dakota. Now, with the dramatic fall in energy prices in the past year, some of that economic activity has slowed a lot. And I don't mean to belittle that hardship in comparing it with, say, five or 10 years ago; how much average income is higher in a lot of these areas that we described and how many more jobs have been created is a real sign that we've got some parts of the economy that are doing well, but there are other parts such as healthcare and some other industries that continue not to be as innovative as we would like to help boost aggregate productivity growth.
Benz: Let's talk about why productivity growth is such an important driver for our economy and why it's a set of figures that you pay so much attention to. What are the knock-on effects from slow productivity growth?
Slaughter: Great question. I think the biggest reason that it matters economically is the growth in output per worker that is created by people in the companies that they work in or in their new companies that they start on their own. That's what drives growth in incomes for people. The jobs and the incomes that those jobs create are very tightly linked around the world for many, many generations to growth in productivity. So, slow growth in productivity, all else equal, means slow growth in wages. And when you look at the data on growth in real wages in the United States in recent years and over the past two to three decades, what we see is real wage growth for a lot of workers has been very slow. In fact, for some workers, real wages are falling rather than rising. And a main force that's inhibiting the growth in people's incomes is precisely slow productivity growth.
Benz: And there are additional repercussions you mentioned: slowing tax receipts, for example, as a result of--
Slaughter: Yeah, that's a big one. We all know we're in an environment where the baby boom generation is aging, and those people are moving into traditional retirement years. And as people age, they tend to consume more healthcare. That is a coming force that's going to put more pressure on the U.S. government budget through the increased spending that will be mandatory through Social Security, Medicare, and Medicaid. So, those expenditures are almost surely coming. And what would make the fiscal pressures of those growing expenditures less is if we had faster growth in workers' incomes and in corporate profits because of higher productivity. So, when the Congressional Budget Office and other analysts look at the fiscal future of the United States, one of the real drivers of how moderately or hugely challenging it's going to be to face the fiscal pressures of an aging population is productivity growth.
Benz: So, overall, it's a fairly pessimistic picture. Are there any reasons for optimism that you see?
Slaughter: Sure. And I tend to be kind of an optimistic person. I guess the biggest one I would say has to do with a lot of these policy supports for productivity growth we talked about earlier--things like a competitive tax policy, a reasonable high-skill immigration policy that invites the world's best and brightest to come work here, supports for education, supports for trade and investment across borders. There is a lot of agreement, I think, in terms of the academic research and the implied policy options. We kind of know what to do, what would be the right policy choices in a lot of these areas, to help raise the likelihood of productivity growth.
So, I think a big optimistic message here is that we know the basics of a lot of policy changes that could support productivity growth in the United States. It's not as if we don't know what to do in terms of policy. I think the challenge for why these policies aren't happening is not economic uncertainty; frankly, it's more the policy environment in Washington, D.C., where ongoing partisanship and a set of other related forces are not allowing Congress and the president to change the laws and regulations to support productivity. So, if you waved a magic wand and somehow got Washington to be less dysfunctional, I think it's not hard to see a scenario where some day we could have some really supportive policy changes.
Benz: Matt, thank you so much for being here to share your insights.
Slaughter: My pleasure. Thanks very much.
