How can government help boost productivity?
In a recent issue of National Review (“Toward a National Productivity Strategy,” December 31, 2016), Robert D. Atkinson outlined a limited but important role for government. The editors asked policy experts for their thoughts.
Is Unemployment Productive?
By Oren Cass
Are unemployed workers a good thing? The math of productivity says yes: Every time a worker with below-average output per hour exits the work force, economy-wide output per hour increases. Ban low-wage work entirely and “productivity” would skyrocket. So would prices. Total output and standards of living, especially for lower-income households, would fall.
Perhaps that seems a reductio ad absurdum, undermining a sound principle by taking it to a logical extreme — except that, in his case for a national productivity strategy, Rob Atkinson embraces it: “The former CEO of McDonald’s reported that, in response to the possibility that the minimum wage will be raised to $15 an hour, McDonald’s began accelerating its deployment of self-serve kiosks and other automation technologies,” he writes. “Wonderful! Fewer low-wage jobs.”
Is that “wonderful”? McDonald’s can now serve the same number of customers with fewer hours of human labor. Perhaps the restaurant will replace four or five cashiers with a single IT technician and some expensive equipment. In the standard economic formulation, we have achieved “productivity growth.” But if the technology is deployed only under threat of a government ban on low-cost, low-productivity labor, presumably that means it is more expensive than the cashiers that it will replace. Provision of fast food to the public becomes less efficient.
To generalize this example: A $15 minimum wage is a ban on low-wage labor. If government could command by fiat that all workers shift into higher-productivity jobs justifying a higher wage, that would be terrific. But if a low-wage worker could secure employment in which his productivity justified a wage of $15 per hour, he presumably would not have been working at the lower wage in the first place. If our enthusiasm for productivity obscures the value of work that is less productive — work that, for many people, provides an initial step on the economic ladder or even a longer-term source of self-sufficiency — then we have lost sight of the path toward long-term prosperity that encouraged a focus on productivity to begin with. It is no solace for the unemployed that they only need to dedicate zero hours to their zero output; it should not comfort policymakers either.
Most facets of Atkinson’s national productivity strategy do not rely on regulatory efforts to drive labor costs higher; they aim to promote innovation that will cost-effectively boost productivity and therefore be adopted by choice. But the central question from the minimum-wage example remains: Whose productivity grows? To paraphrase Chief Justice John Marshall, we must never forget that it is people we are expounding. The productivity growth we target should be the increased productive capacity of the actual workers who populate the American economy.
Suppose, minimum wage aside, McDonald’s finds ways to reduce its costs by substituting capital (automated kiosks) for labor (cashiers). Is the productivity-growth story now one of unmitigated success? Much still depends on what happens to the newly unemployed cashier. Atkinson makes a compelling case that automation will not weaken the economy-wide demand for labor. Robots are not coming to take all the jobs — to the contrary, productivity growth typically begets job growth. But are those new jobs ones in which the former cashiers can now work at higher levels of productivity? If not, their productivity might decline.
The effect is more obvious when higher-productivity jobs are rendered obsolete. For instance, as some manufacturing task becomes automated, the (perhaps relatively few) remaining machine operators become more productive while the (perhaps more numerous) ex-workers may become less so if their only other job options are in personal service. Even with increases in both GDP and total employment, the losers can significantly outnumber the winners.
None of this suggests we should stifle innovation or constrain automation. Long-run economic gains demand technological progress. We should also be deeply skeptical of government’s ability to “manage” progress more effectively than the market can drive it. But if we do believe that a national productivity strategy can help steer the market toward a better outcome — toward greater production from actual workers — than it will achieve on its own, then that strategy must include a perspective on whose productivity will improve and how.
If the least productive workers can just disappear, policymakers achieve “success” by dismissing the challenge that deserves greatest attention. Instead, our conception of “productivity growth” must impose accountability for labor-market exits, recognize the value of keeping low-productivity workers connected to the job market, and have an explicit goal of ensuring that those workers are included in progress. This is doubly true because productivity measures do not fully capture the value of a job, which offers substantial non-economic benefits to many workers and may also be the best avenue for them to gain new skills and thereby increase their productivity over time. A high-productivity job requires a highly productive worker. A future filled with such jobs will materialize only if today’s less productive workers become able to do them.
— Oren Cass is a senior fellow at the Manhattan Institute.
This Is Not a ‘Market’ Failure
By Veronique de Rugy
Robert Atkinson writes that boosting productivity growth is one of the most important policy challenges of our time. On this, we agree. Pushing productivity back up to 1990s levels would be one potent way to truly “make America great again.” Unfortunately, Atkinson does not believe that traditional laissez faire policies alone can get us there. That’s why he suggests that the president put in place what he calls a “national productivity strategy.” If that sounds a bit like industrial policy disguised as the free market to you, it’s because it probably would turn out that way.
I should say from the start that I actually agree with a lot of what Atkinson says. His overall argument about productivity is a good one. It is true that increasing the rate of productivity, which is driven largely by technology and globalization, will increase the standard of living for lower- and middle-class Americans. And many economists have lamented the slower productivity-growth rate of the last 15 years or so.
I even agree with a few of his suggestions about how to improve the situation. Strengthening the rule of law and cutting back the anti-competitive stranglehold of unnecessary regulations are always good policies. And there are important ways that the federal government can kick-start productivity as well. Adopting cutting-edge technologies for government services and administration will not only improve how our government functions, it will create a real demand for innovative services among providers. These are all good ideas.
Likewise, because I’m a critic of the Small Business Administration, Atkinson’s discussion of America’s “small-business cronyism” is music to my ears. “Small businesses” qua small businesses aren’t the engine of growth, as politicians like to claim (and pander) — younger, newer firms are (and the good ones usually grow big). Programs meant to shower businesses with government privileges (e.g., SBA loans or special tax credits) just because these firms are small are misguided, to say the least.
Where I part with Atkinson is his argument that bureaucrats should implement policies to engineer a specific capital/labor ratio that he believes will best stimulate productivity.
Atkinson’s argument goes like this: Capital investment is the principal driver of productivity growth. Businesses currently invest too little in capital because its substitute, labor, is too cheap. Therefore, Atkinson believes, the government should implement policies to intentionally raise the cost of labor so that businesses invest in labor-saving technologies and therefore increase productivity.
How would he do that? Simply by having the government raise the minimum wage and cut immigration. To his credit, as someone who isn’t shy about using the government to achieve a stated goal, he recognizes that raising the minimum wage to $15 or curtailing low-skilled immigration will screw over low-income workers. But that’s actually the goal. He writes, “Wonderful! Fewer low-wage jobs.”
I’ll give him one thing: It’s a brave argument. I am having a hard time understanding exactly which demographic — profit-minded businesses or labor-minded activists — this will enrage the most. But for conservatives and libertarians who are skeptical of technocratic schemes, it is a non-starter.
It’s not a question of succumbing to the Luddite fallacy. Progress and technological advancement have often meant fewer jobs in the improved industries in the short run, only to create a wealth of new opportunities in the long run. But there is a big difference between a sector adopting new technologies because it makes sense at the time, and the government forcing that shift. Even if someone like Atkinson could determine the “perfect” capital/labor ratio to juice up productivity, it is unlikely that our often self-interested and short-sighted bureaucracy would actually put the right policies into practice.
Finally, Atkinson often conflates “market” failures with government failures, to justify the need for the new kind of industrial policy that he lays out. While he does mention the need to deregulate a bit, he fails to appropriately consider how the incredible growth of the regulatory state across industries is the source of slower growth and poor allocation of capital that he deems a market failure.
Think about the technology sector. Its labor costs are among the highest in the economy, yet it still shrinks from capital investments. Why? Regulatory uncertainty and the precautionary mindset of bureaucrats in Washington. As my Mercatus Center colleague Adam Thierer has pointed out, “Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity.”
That’s not a market failure, it’s a government failure. Atkinson is right that policymakers should start thinking seriously about growth. But there is no need to monkey around with factor prices to do so. Rather, policymakers can best encourage productivity growth by ridding us of their bad laws of the past, and then getting and staying out of the way.
— Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.
Every Public Policy Should Get a ‘Productivity Audit’
By Michael Lind
Robert D. Atkinson’s essay is an important intervention in the national debate about the future of the U.S. economy. While conventional debates focus on the methods of economic policy, such as free trade or protectionism, low taxes, and subsidies, Atkinson rightly focuses on the objective of long-term, economy-wide productivity growth.
At first glance, this might seem unoriginal — after all, who isn’t for innovation and productivity growth? But in practice, many debates about public policy ignore the effects of those policies on national productivity, evaluating them instead by other criteria, including conceptions of fairness or adherence to free-market, small-government orthodoxy.
The debate about the minimum wage is a perfect example, as Atkinson notes. Progressives and many populists favor a higher minimum wage for reasons of fairness, while libertarians and free-market conservatives tend to oppose a higher minimum wage as inefficient because of its possible short-term costs in employment. In opposing a higher minimum wage, many libertarians argue that, ironically, it creates a longer-term incentive for employers to reduce labor costs by investing in labor-saving technology. For national productivity, as long as any transitional unemployment is temporary, a high minimum wage that encourages the automation of tasks that cannot be outsourced is a positive development, not a bad one.
In the case of the environment, one of the unsung triumphs of our age has been technology-driven productivity growth that has reduced the quantity of inputs of energy and raw materials necessary to produce the same amount of output over time. And yet the environmental Left focuses on reducing consumption rather than on increasing efficiency. Meanwhile, dogmatists on the free-market right cannot bring themselves to acknowledge that fuel-efficiency standards and other reasonable regulations can, instead of stifling valuable private-sector innovation, sometimes incentivize it.
Imagine if every public policy were analyzed in terms not simply of moral fairness or short-term cost but of whether it tended to promote or retard long-term productivity growth in a particular sector by encouraging reductions in labor, energy, or material inputs with the help of new technology or innovative organization. Imagine a “productivity audit” of every bill before Congress and of every proposed federal, state, or local regulation. Whatever their other purposes, policies would be evaluated in light of their contribution to productivity. Atkinson’s timely and important manifesto helps to move us toward that goal.
— Michael Lind, a senior fellow at New America, is the author of Land of Promise: An Economic History of the United States.