Planning for Productivity

Last Tuesday, May 23, 2017, President Trump released his first budget proposal, inspiring general discussions on productivity. The budget assumes gross domestic product (GDP) growth will slowly accelerate to 3.0% by 2020 and remain at that level over the forecast period. If those forecasts are going to prove true, or if we are even to see a more modest acceleration from the average of 2.1% growth we’ve had since the end of the Great Recession, it will depend heavily on a meaningful pickup in productivity.

Why is productivity so important? There are only two basic ways to increase GDP: you need more people providing goods and services (really more total hours worked) or you need each person, on average, to produce more output per hour. The second one is productivity. That’s it—more total hours or more output per hour. Those are the only ways to get growth. In the long run, “total hours worked” depends on population growth, and government and businesses have little influence there—for the most part that comes down to demographics. That makes productivity the key to future growth.

The problem is, productivity dropped sharply post-recession and has never really rebounded. We have been here before—productivity growth also declined in the 1970s to levels near where we are today, but managed to turn around.

No cycles are exactly the same, but what might the government be able to do to encourage productivity and achieve a similar rebound?

  • Remove barriers to investing in innovation.
  • Encourage the spread of innovative practices.
  • Provide incentives to increase business investment so workers have more and better tools to work with.
  • Assist in the development of a highly skilled workforce well equipped to face the future.
  • Make it easier to both parent and develop professional skills and experience for those who choose or need to do both.

Elements of all of these were part of the president’s proposal, and not surprisingly Democrats also have a vision of how best to implement these kinds of changes. But both parties would agree (important to note at a time when they seem to agree on little) that encouraging productivity will be the key to faster growth, and companies that help drive productivity gains will play a growing role in our nation’s economy over the upcoming decades.



The economic forecasts set forth in the presentation may not develop as predicted.

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