America's imminent productivity boom

Fresh off their failure to repeal ObamaCare, Republicans are eager to pivot to tax reform. Of course they are. Tax reform is what they do. It's been their policy safe space for 40 years. Targaryens ride dragons, Lannisters pay their debts, and Republicans cut taxes.

But Republicans' tax reform effort may collapse, too. The GOP has reached agreement on only broad goals. And the tax code is arguably just as complicated at the health-care system, if not more so. Both are full of economically thorny and politically unpalatable trade-offs. Republicans might have to settle for a temporary corporate tax cut, which might have little long-term impact on economic growth. Or maybe nothing.

And that might be okay — not optimal, but tolerable. After all, the U.S. is not in economic crisis. The current expansion is the third-longest ever, the economy grew at a solid-if-unspectacular 2.6 percent last quarter, and job gains continue to average nearly 200,000 a month. Policymakers don't need to scramble to juice growth through quickie tax cuts that reduce marginal rates but also revenues.

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Actually, Washington might not need to do much of anything for the economy to grow at 3 percent annually on a sustained basis — a stated GOP goal — versus the 2 percent average of the 2000s. One reason growth pessimists think the economy is stuck permanently in a low-gear New Normal is that productivity has been historically weak, both since the Great Recession and just before. If workers fail to become more productive, the economy and living standards will stagnate. And if America isn't technologically innovative, workers won't become more productive.

Yet America sure looks pretty innovative, at least if you pay attention to what's happening in places like Silicon Valley, Seattle, and New York. Indeed, there's reason to believe official stats are underestimating tech-driven innovation. As my AEI colleague Stephen Oliner, the Federal Reserve's David Byrne, and Daniel Sichel of Wellesley College write in their new paper, "Prices of high-tech products, mismeasurement, and pace of innovation": "We believe that these faster rates of growth in high-tech could presage a second wave of higher productivity growth spurred by the digital revolution."

Here's the problem: The IT revolution seems confined to a narrow group of superstar tech firms and isn't spreading throughout corporate America. For innovation to lift productivity and the broader economy, new technologies must be broadly and efficiently used. We must spread the innovation wealth.

Of course, that still might happen. Economic history suggests such "diffusion" typically takes time. It took decades for factories to figure out how to use electric dynamos rather than steam. Likewise, economists in the 1980s wondered why the arrival of PCs wasn't transforming firms — until that 1990s productivity boom happened.

And in the same way, "the rapid innovation and robust investment of recent years will eventually have an impact, but it could take some time for the next wave of productivity growth to become visible at the aggregate level," concludes a new Peterson Institute paper, "The Case for an American Productivity Revival." A similar argument is made in "The Coming Productivity Boom" by the Progressive Policy Institute's Michael Mandel and AEI Fellow Bret Swanson: "The 10-year productivity drought is almost over. The next waves of the information revolution — where we connect the physical world and infuse it with intelligence — are beginning to emerge."

Some researchers think the widespread and innovative use of big data, AI, and robotics in areas such as health care, education, and the service sector could eventually boost productivity growth high enough that overall 3 percent growth is doable. And this tech wave may be unstoppable as long as government doesn't do something profoundly dumb such as banning or taxing new technologies. Instead, policymakers should be trying to hasten, enhance, and spread this transformation through a variety of public policies, such as making it easier for global tech talent to work in America, reducing regulatory barriers to the adoption of new technologies, boosting competition, and more generously funding science research.

Oh, you can toss tax reform in there, too — as long as it is permanent, doesn't worsen deficits, and focuses on businesses rather than wealthy families. And if Republicans can't pull that off, maybe it's better if their plans end up in the same garbage dumpster as TrumpCare.