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 sar o he Grea Recession in December 2007, and heU.S. economy is recovering seadily. Some indicaors show srengh such as he labormarke, which added more han 600,000 jobs in he pas hree monhs. Ta is grea orpeople looking or jobs righ now, bu many o hese jobs are low-paying, low-bene,and unsable. For he longer erm people need well-paying, sable jobs, and hose willdepend in large measure on produciviy growh. As we explain below, however, he U.S.economy shows some worrisome rends in is produciviy growh.Produciviy growh—he rae a which we increase producion or a given amoun o work and resources—is a he hear o economic growh, compeiiveness, and sus-ained improvemens in living sandards or working Americans. In an economy where workers share he ruis o heir labors, produciviy growh ranslaes ino more and beter jobs, and rising incomes or middle-class amilies. A number o acors aec pro-duciviy growh in he uure, including he pace o business invesmen, he availabiliy o skilled workers, invesmens in science and research, and adequae nancing o bringnew ideas and producs o marke.Te indicaors reviewed in his brie raise a number o concerns abou he uure o U.S.produciviy and, in urn, compeiiveness:
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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.
Furher widening o he U.S. high-ech rade deci signals ha he U.S. economy’scompeiive edge needs resharpening.
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Business investment slowed in the three months through December 2011 andremains historically low.
Corporaions are no direcing heir srong pros o
2Center for American Progress | Making the Right Investments Now is Key to Future Productivity
produciviy-enhancing aciviies bu raher are holding cash or buying back heir ownsock o prop up he share price.
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Private venture capital investors remain reluctant to fund early-stage innovativebusiness ideas.
How produciviy gains are disribued in he economy needs o be addressed, bu hegains we’re seeing are worryingly small. Wih higher produciviy growh we can grow he pie o goods and services available or he same work and be beter posiioned oaddress long-erm challenges acing he U.S. economy: increasingly hreaened middle-class living sandards, he economic needs o an aging populaion, long-erm ederal budge balance, environmenal consequences o economic aciviy, and increased iner-naional compeiion rom rapidly developing counries. Achieving high produciviy growh demands susained policy atenion o creaeprivae incenives and supply complemenary public invesmens. Te budge PresidenBarack Obama delivered o Congress his week makes a down paymen on hese goalsor renewing U.S. produciviy growh wih invesmens in:
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Basic educaion, aordabiliy o college, and ongoing skills developmen o he workorce
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Increased suppor or research and developmen, and ax incenives or manuacurers who creae jobs a home
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ax incenives or business invesmen
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Improved eciency o our ransporaion inrasrucure o reduce business cossCongress should move wihou delay o pass his budge and help build a sronger, moreproducive economy o secure long-erm U.S. economic compeiiveness.
Indicators point to slackening productivity
Productivity growth slows markedly
Worker produciviy—he amoun o goods and services produced in an hour o work in he nonarm business economy—increased by 0.7 percen in he ourh quarer o 2011 bu deceleraed rom 1.9 percen growh in he previous quarer. Produciviy inhe U.S. economy now sands 6.5 percen larger han a he sar o he Grea Recession, bu his pace o growh lags behind ha o previous economic recoveries. A he samepoin in he business cycle, produciviy had increased by 7.9 percen on average or allprior pos-World War II expansions.
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3Center for American Progress | Making the Right Investments Now is Key to Future Productivity
Business investment decelerates too
Produciviy growh in he economy overall ends o ollow business invesmen wih along ime lag—invesmens oday lead o produciviy growh one or wo decades downhe road. So low invesmen oday will likely consrain produciviy increases in he uure.Even beore he Grea Recession, U.S. business invesmen ran a is lowes level relaiveo gross domesic produc, or GDP—he sum o all goods and services produced by workers and equipmen in he Unied Saes—since he lae 1960s. Te recession andnancial crisis drove business invesmen even lower, bu since March 2010 businessinvesmen has grown aser han overall U.S. GDP.Bu business invesmen in equipmen, aer a rapid expansion o 16.2 percen in hehird quarer o 2011, deceleraed o 5.2 percen in he ourh quarer o ha year—heslowes pace since he economy began expanding again in June 2009. Acceleraion o business invesmen rom he summer o 2009 onward coincided closely wih AmericanReinvesmen and Recovery Ac spending on public invesmen and middle-class ax cus, and he demand i propelled rom privae businesses or invesmen goods helped boos equipmen spending o 7.6 percen o GDP a he close o 2011.
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Tough sill recovering, business invesmen will only gain and susain momenum i businesses expec more sales in he uure, which can come rom sronger consump-ion a home or rom increased expors. In he shor erm expor demand will ace anuphill batle agains Europe’s simmering banking crisis and China’s slowing growh, buCongress has he power o keep domesic sales srong by coninuing he payroll ax cuand unemploymen insurance benes, which are se o expire a he end o February.
Businesses prioritize nonproductive ends
Te low level o business invesmen has litle o do wih business proabiliy. Te cor-porae pro rae in nonnancial businesses—which ell o 1.8 percen o oal asses inDecember 2008—has recovered and been consisenly a or above 2.6 percen hrough2011. Raher han hiring producive workers or making subsanial new invesmens,hough, businesses are direcing resources oward nonproduciviy-enhancing uses.Firs, businesses are hoarding cash, which amouned o 7.2 percen o heir oal assesin Sepember 2011, down slighly rom June 2011, when cash holdings were a heirhighes level since December 1959.Second, raher han hiring or invesing, corporaions are using srong pros o prop upheir sock prices—a key acor in execuive compensaion—by repurchasing heir ownshares and paying ou dividends. In oal corporaions devoed resources worh 108 percen
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Making the Right Investments Now Is Key to Future Productivity
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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