Desperately Needed: Reforms to Raise Productivity Growth

By John Taylor.

"The data released this week on labor productivity growth are really terrible. The growth rate has been negative now for three quarters in a row, and it was – .4 percent over the past year. Unfortunately, these data are reinforcing a pronounced negative trend in recent years which implies declining income growth and lower standards of living.

Sadly, there is little public discussion of what to do about it.  Many say that policy reforms—whether tax reform, regulatory reform, budget reform, or monetary reform—will not work because the stagnation is “secular,” and we are in a new era of permanently lower growth. Others say that productivity data are not reliable and should not influence public policy.  Still others say that supply-side reforms will not work because we have a demand-side problem; rather we need another short-term economic stimulus.

The chart suggests otherwise. It shows productivity growth since the 1960s smoothed in two different ways—a five-year moving average and a Hodrick-Prescott trend. Both show major swings in productivity over this period. I have highlighted the swings with the green arrows.



Clearly there is nothing permanent or secular here.  Productivity growth fell in the 1970s and then picked up in the 1980s and 1990s.  Clearly it is not demand related: Virtually all schools of macroeconomics argue that demand deficiency periods are the length of the business cycle not decades or more.

In my view, as explained here, it is a policy-performance cycle because one can see changes in economic policy that are closely associated with the changes in growth.  So what we need is a public discussion—inside and outside of the political campaigns—on practical policy reforms to turn productivity growth around, including a clear explanation of why any proposed reform will, in fact, raise productivity growth."