Low Productivity Growth Helps Explain Slow American Recovery

The United States economy could be 7 percent bigger if productivity had kept up with other trends.

A cafe in Stonington, Maine, February 23, 2011
A cafe in Stonington, Maine, February 23, 2011 (Carol Blyberg)

Low productivity growth may explain why American incomes have remained fairly stagnant since the financial crisis — and why the world’s largest economy has only barely recovered from it.

In Philadelphia on Friday, outgoing Federal Reserve chairman Ben Bernanke said in a farewell speech, “Disappointing productivity growth must be added to the list of reasons that economic growth has been slower than hoped.” Although he wasn’t quite sure what caused it.

One reason, said Bernanke, may be that tight credit is inhibiting innovation. Another is that weak sales possibly discourage hiring and investment although consumer spending is already returning to precrisis levels.

Central bank economists estimate that gross domestic product is about 7 percent lower than where it would be if increases in productivity had kept up with general trends in the economy.

After stalling between 1973 and 1995, productivity growth rebounded to levels comparable to the postwar boom years in the late 1990s and early 2000s, aided in large part by the Internet and rise of other information technologies. The main worry at the time was that incomes weren’t keeping up with productivity increases. Now that productivity growth is lackluster, even the extent to which wages could theoretically rise is limited.

That paints a bleak picture for the median American family, nearly half of whose wealth was wiped up between 2007 and 2010. The housing bubble masked, or compensated for, the lack of real income growth in the preceding years. Adjusted for inflation, median household income has actually declined since 2000. Yet the tax burden has continued to rise for middle-class homeowners, something Bernanke didn’t mention in his speech but which surely accounts, at least in part, for the weak sales he identified as a possible cause of disappointing productivity growth.