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December 30, 2005
The Powerful Trend in Productivity and Its Significance
Arnold Kling reports that average U.S. productivity growth over the past five years, at almost 3.4% annually, is at the highest level in half a century.
The importance of this performance is quite significant:
. . . it is important to understand that, for the most part, productivity growth is the economy's gift to policymakers, not the other way around. It would be foolish to attribute to tax cuts that which ought to be attributed to Moore's Law. . . .
. . . Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound.
In The Great Race, I argued that our economic future boils down to two trends. Moore's Law is raising productivity, helping to increase the size of the economy relative to government spending. On the other hand, Medicare is growing, which tends to increase government spending relative to the size of the economy.
In the 2-1/2 years since I wrote that essay, nothing has been done to slow the growth of Medicare. However, if the economy can sustain or increase its rate of productivity growth, the long-term outlook may be reasonably good. . . .
Only the dynamic U.S. economy, if anything, can stay ahead of its free spending politicians.
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