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Making the Right Investments Now Is Key to Future Productivity

Making the Right Investments Now Is Key to Future Productivity

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Adam Hersh and Christian E. Weller discuss the latest productivity numbers and explain what it means for U.S. economic competitiveness.
Adam Hersh and Christian E. Weller discuss the latest productivity numbers and explain what it means for U.S. economic competitiveness.

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Published by: Center for American Progress on Feb 14, 2012
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1Center for American Progress | Making the Right Investments Now is Key to Future Productivity
Making the Right Investments NowIs Key to Future Productivity
Quarterly U.S. Productivity and Innovation Snapshot
Adam S. Hersh and Christian Weller February 15, 2012
Introduction
I has been our years since he sar o he Grea Recession in December 2007, and heU.S. economy is recovering seadily. Some indicaors show srengh such as he labormarke, which added more han 600,000 jobs in he pas hree monhs. Ta is grea orpeople looking or jobs righ now, bu many o hese jobs are low-paying, low-bene,and unsable. For he longer erm people need well-paying, sable jobs, and hose willdepend in large measure on produciviy growh. As we explain below, however, he U.S.economy shows some worrisome rends in is produciviy growh.Produciviy growh—he rae a which we increase producion or a given amoun o  work and resources—is a he hear o economic growh, compeiiveness, and sus-ained improvemens in living sandards or working Americans. In an economy where workers share he ruis o heir labors, produciviy growh ranslaes ino more and beter jobs, and rising incomes or middle-class amilies. A number o acors aec pro-duciviy growh in he uure, including he pace o business invesmen, he availabiliy o skilled workers, invesmens in science and research, and adequae nancing o bringnew ideas and producs o marke.Te indicaors reviewed in his brie raise a number o concerns abou he uure o U.S.produciviy and, in urn, compeiiveness:
•
Productivity growth slowed sharply in the final quarter of 2011 and has increased atonly a modest pace since the start of the current business cycle in December 2007.
Furher widening o he U.S. high-ech rade deci signals ha he U.S. economy’scompeiive edge needs resharpening.
•
Business investment slowed in the three months through December 2011 andremains historically low.
Corporaions are no direcing heir srong pros o
 
2Center for American Progress | Making the Right Investments Now is Key to Future Productivity
produciviy-enhancing aciviies bu raher are holding cash or buying back heir ownsock o prop up he share price.
•
Private venture capital investors remain reluctant to fund early-stage innovativebusiness ideas.
How produciviy gains are disribued in he economy needs o be addressed, bu hegains we’re seeing are worryingly small. Wih higher produciviy growh we can grow he pie o goods and services available or he same work and be beter posiioned oaddress long-erm challenges acing he U.S. economy: increasingly hreaened middle-class living sandards, he economic needs o an aging populaion, long-erm ederal budge balance, environmenal consequences o economic aciviy, and increased iner-naional compeiion rom rapidly developing counries. Achieving high produciviy growh demands susained policy atenion o creaeprivae incenives and supply complemenary public invesmens. Te budge PresidenBarack Obama delivered o Congress his week makes a down paymen on hese goalsor renewing U.S. produciviy growh wih invesmens in:
•
Basic educaion, aordabiliy o college, and ongoing skills developmen o he workorce
•
Increased suppor or research and developmen, and ax incenives or manuacurers who creae jobs a home
•
ax incenives or business invesmen
•
Improved eciency o our ransporaion inrasrucure o reduce business cossCongress should move wihou delay o pass his budge and help build a sronger, moreproducive economy o secure long-erm U.S. economic compeiiveness.
Indicators point to slackening productivity
Productivity growth slows markedly
 Worker produciviy—he amoun o goods and services produced in an hour o work in he nonarm business economy—increased by 0.7 percen in he ourh quarer o 2011 bu deceleraed rom 1.9 percen growh in he previous quarer. Produciviy inhe U.S. economy now sands 6.5 percen larger han a he sar o he Grea Recession, bu his pace o growh lags behind ha o previous economic recoveries. A he samepoin in he business cycle, produciviy had increased by 7.9 percen on average or allprior pos-World War II expansions.
1
 
3Center for American Progress | Making the Right Investments Now is Key to Future Productivity
Business investment decelerates too
Produciviy growh in he economy overall ends o ollow business invesmen wih along ime lag—invesmens oday lead o produciviy growh one or wo decades downhe road. So low invesmen oday will likely consrain produciviy increases in he uure.Even beore he Grea Recession, U.S. business invesmen ran a is lowes level relaiveo gross domesic produc, or GDP—he sum o all goods and services produced by  workers and equipmen in he Unied Saes—since he lae 1960s. Te recession andnancial crisis drove business invesmen even lower, bu since March 2010 businessinvesmen has grown aser han overall U.S. GDP.Bu business invesmen in equipmen, aer a rapid expansion o 16.2 percen in hehird quarer o 2011, deceleraed o 5.2 percen in he ourh quarer o ha year—heslowes pace since he economy began expanding again in June 2009. Acceleraion o  business invesmen rom he summer o 2009 onward coincided closely wih AmericanReinvesmen and Recovery Ac spending on public invesmen and middle-class ax cus, and he demand i propelled rom privae businesses or invesmen goods helped boos equipmen spending o 7.6 percen o GDP a he close o 2011.
2
Tough sill recovering, business invesmen will only gain and susain momenum i  businesses expec more sales in he uure, which can come rom sronger consump-ion a home or rom increased expors. In he shor erm expor demand will ace anuphill batle agains Europe’s simmering banking crisis and China’s slowing growh, buCongress has he power o keep domesic sales srong by coninuing he payroll ax cuand unemploymen insurance benes, which are se o expire a he end o February.
Businesses prioritize nonproductive ends
Te low level o business invesmen has litle o do wih business proabiliy. Te cor-porae pro rae in nonnancial businesses—which ell o 1.8 percen o oal asses inDecember 2008—has recovered and been consisenly a or above 2.6 percen hrough2011. Raher han hiring producive workers or making subsanial new invesmens,hough, businesses are direcing resources oward nonproduciviy-enhancing uses.Firs, businesses are hoarding cash, which amouned o 7.2 percen o heir oal assesin Sepember 2011, down slighly rom June 2011, when cash holdings were a heirhighes level since December 1959.Second, raher han hiring or invesing, corporaions are using srong pros o prop upheir sock prices—a key acor in execuive compensaion—by repurchasing heir ownshares and paying ou dividends. In oal corporaions devoed resources worh 108 percen

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