A Productivity-Focused Growth Policy Model

Abstract

This paper responds to a multi-decade decline in the rate of U.S. economic growth by proposing a four-element technology-based growth policy, emphasizing productivity as the key policy target. Multiple indicators are presented to demonstrate the negative impacts of declining investment in key growth variables. The length of the U.S. decline, although in some cases not the magnitude, has also been experienced by most western economies, so the following discussion has broad relevance. In the U.S. case, a decline in productivity growth has resulted not only in slower income growth but also in increased income inequality. The consequence has been varying degrees of social and political turmoil, which has been accentuated by policy mistakes, such as imposition of tariffs and withdrawal from international trade agreements. The growth policy problem is explained in terms of systematic underinvestment in four major categories of economic assets—technology, capital formation (hardware and software), skilled labor, and technology-based infrastructure—that are required to drive long-term productivity growth. Economic growth policy research has for decades emphasized investment in technology (R&D) and a rather strained extension to economic impact. The reason for the conceptual inadequacy is the fact that three other major asset categories are critical to achieving sustained economic growth: capital formation, skilled labor, and technical infrastructure. These latter three asset classes are absolutely essential to the technology-based economy, but they receive incomplete attention at best. Failure to adopt this four-asset growth model has greatly constrained rates of growth in general and particularly in workers’ incomes over the past 40 years.