The Progressive Case for Productivity Growth

How a pro-productivity agenda can raise wages, lower inequality and sustain the middle class.

The progressive movement, from its very beginnings, put great stock in marshaling scientific and technological advances to solve social and economic problems. For a quarter century or more, the movement’s adherents took a rational, technocratic approach to reforming everything from financial institutions to schools.

Early progressives were big believers in accelerating productivity as a means of increasing people’s wages and improving their work lives. The author and social activist Jack London captured the sentiment of the times, at least for Socialists, when he said,”Let us not destroy these wonderful machines that produce efficiently and cheaply. Let us control them.” Indeed, in those early days, progressives differed from conservatives only insofar as they were more concerned about ensuring that the fruits of productivity growth were widely shared with workers and consumers.

Unfortunately, a growing number of progressives in the last few years have become decidedly ambivalent, if not downright hostile toward the idea of increasing productivity, seeing it as a threat to progressive goals of full employment, fairness, and stability. Many of today’s progressives believe that average American workers no longer benefit from gains in productivity, and that productivity growth through technology-based automation will ultimately kill jobs. Gains in productivity, the logic goes, mean that fewer workers are needed to do the same work. Robots and artificial intelligence are the poster children for these fears.

But in truth, the only sustainable way to increase wages for Americans and to help increase government revenues is what it was a century ago: to raise productivity. That’s why a truly progressive economic agenda must include pro-productivity policies that drive growth. This includes policies such as increased public investment in research and technology as well as tax policies that spur investment in equipment and machines.

Wages Can’t Grow Unless Productivity Rises

Many prominent progressives argue that despite vast gains in productivity, average workers have benefited little. For example, the liberal Economic Policy Institute (EPI) states that the vast majority of U.S. “workers have not benefited from productivity growth for four decades.”

If this were true, then progressives would be well justified in abandoning their faith in productivity. But it’s not.

Liberal economist Dean Baker finds that from 1973 to 2006, median hourly compensation grew by 20.1 percent while what he calls “usable” productivity – “productivity growth that can be translated into higher wages and living standards” – rose by 47.9 percent over that same time period. While Baker attributes the difference in wage and productivity gains to rising inequality, he also cites “a more fundamental problem”:

[E]conomic growth, or more specifically productivity growth – has not been very strong over this period. Productivity growth is the key variable to measure, because over the long-term, productivity is the main determinant of living standards.

Data from the Congressional Budget Office also show that the bottom 90 percent got between 42 and 47 percent of the growth in after-tax income since 1980. To be sure, average Americans would have gotten more if income inequality had not increased, but they would have gotten nothing had productivity stalled completely. Sustainable real wage increases are simply not possible unless productivity grows as well. In the absence of productivity gains, the lion’s share of wage increases are merely nominal – the products of rising inflation.

Increasing Productivity Doesn’t Kill Jobs – It Creates Them

In an economy that still is not creating jobs fast enough, some progressives argue we can ill afford to embrace machines that destroy jobs. As liberal economist Joe Stiglitz states, “It doesn’t have political appeal to say the reason we have a problem [job losses] is we’re so successful in technology.”

But studies from organizations as diverse as the International Labor Organization, the Organisation for Economic Cooperation and Development and the United Nations Industrial Development Organization show that increases in productivity lead to more, not fewer, jobs. From 1947 to 2012 there was an inverse relationship between productivity growth and unemployment: periods of higher productivity were associated with lower rates of unemployment.

One reason productivity creates jobs is that when organizations raise productivity, they don’t put those savings under a mattress; they either cut prices or raise wages. And people spend their higher wages or savings on a wide variety of things: Going out to dinner, buying a new car, sending their kid to college. This spending creates more jobs while at the same time fueling a positive and optimistic cycle of more spending, more jobs, more investment, and so on.

Another reason higher productivity creates jobs is that it helps firms maintain or expand global market share. A principal way that rich countries can compete with low wage nations is to be more productive. For example, German manufacturers invested 65 percent more in machinery and equipment over the last 15 years to drive productivity than did U.S. manufacturers. That’s one reason why the German economy has a 55 percent higher share of workers in manufacturing and why they run a manufacturing trade surplus, including with China, despite paying their workers 40 percent more than U.S. manufacturing workers.

But some still refuse to see the connection. In their book, The Second Machine Age, Andrew McAfee and Erik Brynjolfsson argue that after growing together in the prior decades, “productivity and employment have become decoupled” since 2000. And many progressives have latched onto this factoid as proof that productivity kills jobs. But the reason productivity gains and employment rates became “decoupled” is that while productivity continued to grow (albeit at a much slower rate than before), the growth of the working-age population slowed. The number of Americans aged 25-54 years entering the workforce declined, as did the entry of women into the labor market, as the 30-year long expansion peaked. In other words, the slowdown in labor force growth had absolutely nothing to do with productivity growth and everything to do with changing demographics. Employment can’t increase if the population of potential workers doesn’t increase as well.

Raising Productivity Won’t Contribute to Inequality – It Will Reduce It
Many progressives blame productivity for increasing inequality, seeing it as the cause of the “hollowing out” of middle-class occupations. However, as the liberal Economic Policy Institute (EPI) has shown, productivity has not been the cause of income inequality in recent decades. EPI finds that inequality didn’t increase because middle wage jobs were eliminated by productivity gains. Rather, inequality increased within occupations, with some individuals making “winner-take-all” incomes at the expense all other workers in the same occupation. This had nothing to do with productivity.

Moreover, high productivity has historically been associated with reduced income inequality, not more. During the 1960s, productivity grew at rates more than twice as fast as it has in the last 10 years. However, income inequality declined while median family wages increased by almost 30 percent.

Higher Productivity Means More Government Resources to Spend on Progressive Goals

A key impediment to achieving many progressive goals is the size of the federal budget deficit. Even those who deny that the national debt is a problem admit that it would be easier to increase federal spending if budget deficits were not so large. Higher productivity can play a key role in boosting revenues.

If we could increase productivity by 1 percentage point a year, after ten years, federal revenues would be more than $400 billion larger due to economic growth. That money could be used to increase public investment and spending to advance social goals like reducing poverty, fixing our cities, and expanding health care.

Raising Productivity Improves Living Standards for the Middle Class

Higher productivity is also key to bringing more Americans into the middle class.

Efficiency gains in the manufacturing of consumer goods and the production of food mean that these products are now more affordable for middle-class consumers, and that families have more income to spend on items like education and housing.

For example, American households in the third income quintile spend just 12 percent more on food at home than do households in the second (lower income) quintile, but they are able to spend almost 50 percent more on housing and twice as much on retirement savings and other insurance. Getting more Americans into these higher income levels can’t happen without greater productivity.

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Ultimately, the question is whether we would prefer to forestall productivity and consign our children to a world no better than the one we have now. The answer is no.

Progressives should encourage, rather than resist, productivity growth as the means to improving the living standards and economic well-being of the middle class. This means they should embrace a national productivity agenda. This should include a wide array of policies, but three are worth mentioning here. As corporations have cut funding for incumbent worker training, government policy needs to step in, as a better trained workforce not only helps boost labor productivity, it makes it easier for workers to get other jobs if they are laid off. We need significantly more funding for productivity-related R&D, in areas such as robotics, artificial intelligence, and more durable materials. Finally, given that U.S. companies invest significantly less as a share of GDP in new machinery, equipment and software than they did 40 years ago, we need stronger tax incentives to encourage companies to invest in new, productivity-enhancing technology.

Many progressives are also uneasy about productivity because they see it as too disruptive. As demonstrated above, higher productivity actually is not very strongly related to net job loss. Nevertheless, progressives need to champion transforming the Trade Adjustment Assistance Act (TAA), which helps workers hurt by trade, into a comprehensive Trade and Technology Adjustment Assistance Act (TTAA), to help all displaced workers, no matter the cause of their displacement – and to help workers adapt to changes brought by gains in productivity and automation.

Progressives were right to embrace technological advances and productivity a century ago, and it is all the more important to embrace them now, because constant innovation is the lifeblood of our economy. To slow progress or reverse course would be to gradually impoverish rather than enrich people’s lives – which would be a decidedly unprogressive thing to do.

Robert D. Atkinson

Robert D. Atkinson is President of the Information Technology and Innovation Foundation.