May 22, 2020 at 5:00 am ET
With the massive stimulus packages to respond to COVID-generated economic crisis, the federal budget deficit is set to explode to $3.8 trillion this fiscal year and $2.1 trillion next year. This means that once the crisis has passed, Congress will be confronted with an even more massive national debt, which will likely mean we are facing, in the words of Financial Times columnist Rana Foroohar, “the new age of American austerity.” Ideologues will trumpet predictable policy responses, but the only sure way to stave off that terrible fate will be to put in place a national productivity strategy.
Before we get to that, consider the likely alternatives. Conservative supply-siders will no doubt ignore the debt and continue to champion their favorite cure all: tax cuts. This would mean even higher deficits. Progressives in turn will likely invoke Modern Monetary Theory — the notion that since the Federal Reserve can just keep printing money it cannot default on public debt — to justify not only doing nothing, but actually increasing social welfare spending. But to paraphrase President George H.W. Bush, that is nothing but “voodoo economics”: eventually the chickens will come home to roost.
Make no mistake: Either course eventually would lead the federal government to default on its debt, which would force a combination of draconian tax increases and severe spending cuts, or produce another widespread economic contraction.
Fiscal hawks and many moderates may press for the more responsible approach of reducing spending and raising taxes as soon as the immediate crisis is over instead of waiting for the ideologues to drive the country all the way to the brink of default. But this path would slow growth in the short to medium term, and to the extent public investment in areas like research and development and education would need to be cut, long-run growth would suffer. Moreover, to the extent Congress cuts defense spending and programs to boost advanced technology industries, the result would be a weaker America and a stronger China. Meanwhile, the reduced spending would of course bring hardship, especially for the most vulnerable Americans.
The way to avoid all of that is to establish a national strategy to significantly boost productivity — the amount of economic output we produce per hour of work. Indeed, given the massive deficit and debt we will be saddled with when the immediate crisis passes, we can’t wait. Boosting productivity needs to become the central focus of economic policy now.
A policy agenda that automates work and equips workers with the tools and training they need to produce more in the same amount of time will bring down the debt-to-GDP ratio — the key indicator of fiscal health — as the economy grows. The Congressional Budget Office currently projects that labor productivity will grow just 1.4 percent per year between now and 2035. But enacting a national productivity strategy that doubles the productivity growth rate to 2.8 percent — a rate lower than we achieved in the late 1990s and early 2000s — would boost GDP and increase federal revenues enough to reduce the debt-to-GDP ratio from 166 percent in 2035 to 93 percent. If Congress were to add in a carbon tax that is equivalent to just 10 percent of the increase in annual GDP, the debt-to-GDP ratio then would fall to just 63 percent, and we would take an important step toward addressing climate change. And faster productivity growth would mean much faster real wage growth, including for low-income Americans.
So, what would such a strategy look like? First and foremost, it would require the government to think like an enterprise and take steps to boost all aspects of the economy. To that end, Congress should require the next administration to establish a national productivity strategy that identifies barriers to faster growth and takes a sector-by-sector approach to solving them.
Policymakers should review regulations through the lens of how they impact productivity. Lawmakers should significantly increase government support for research and development that is likely to boost productivity — in areas such as robotics, new materials, and artificial intelligence. They should restore the investment tax credit that Congress eliminated in 1986 to spur more investment in new machinery, equipment and software. And government should spur faster and wider deployment of productivity-enhancing technology platforms, including 5G wireless broadband, digital signatures and mobile payments.
So why don’t we have such a national strategy? A big reason is that conventional economics, with its myopic focus on markets instead of firms, institutions and technology, has little to say about productivity. As Clinton administration economist Alan Blinder wrote: “Nothing — repeat, nothing — that economists know about growth gives us a recipe for adding a percentage point or more to the nation’s growth rate on a sustained basis. Much as we might wish otherwise, it just isn’t so.” When this is the message, no wonder policymakers largely ignore the issue.
But while conventional economists might not be aware of it, many other disciplines, including business administration and public policy, and “new growth theory” economics, do in fact have important insights for how government can boost productivity. It’s time for Washington to reject the old “market fundamentalism” and “demand-driven” paradigms and look instead to these disciplines to construct a new approach that focuses on national production systems.
Skeptics may argue we can’t afford productivity growth when the labor market is distressed. But economic research makes clear that higher productivity does not lead to fewer jobs, because it reduces prices and increases wages, which spurs job creation. Moreover, embracing productivity is the only way to avoid a future of bleak and bitter austerity. So Congress should start with a productivity down-payment on the next major stimulus package planned for the summer.
Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation, the leading think tank for science and technology policy.
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