The Fallacy of Weak Productivity

Models of the economy are pretty useful tools. And simple models are some of the most useful. They help people envision how the world works. They help organize thinking.

For example, the model that says potential U.S. economic growth is determined by "population (labor force) growth" plus "productivity" is an elegant model that shows how adding workers, or having them become more productive, leads to more economic growth.

But, even an elegant model can lead people astray when the inputs are misunderstood. As they say: Garbage in, Garbage out!

Population growth is relatively straight-forward and doesn't change much. It's growing at about 0.8% per year over the last decade. Yes, immigration and the participation rate add some complexity, but labor force growth is the easiest part of the model to deal with.

Productivity growth, on the other hand varies, and is the true key to this model. Non-farm productivity growth, as measured by the government, has averaged slightly above 1% per year lately. That's slow by most historical standards.

Add these two up (Population, 0.8%) + (Productivity, 1.0%) = 1.8% growth; which is why many economists argue that the U.S. economy has a potential growth rate of just 2% per year, possibly less. And they also say it can't be fixed.

But, can this really be true? New technologies are boosting productivity everywhere. As recently as 2009 it took over a month to drill and complete a new oil well; now it takes around a week. Farmers have boosted the bushels of corn they get from every acre of farmland by 2.4% per year since the early 1990s – while new tech (drones, GPS, ground sensors) helps save on inputs of hours, water, fuel, and fertilizer.