“It’s really hard to get a handle on what the underlying trend in the growth rate of productivity is by looking at just the last couple of years,” says Bivens. “If you start to think about what has been strange about the last five or six years in the economy that has coincided with this deceleration of productivity, it’s really obvious: We’re still very scarred from the fallout from the Great Recession.” The report found a correlation between the two—when demand goes up, so does investment. Since the economic recovery has been slow and steady, that in turn hasn’t resulted in the kind of spending which would spur companies to make productivity-improving investments in order to catch up with demand.
Bivens also considered another related theory: that the lack of demand in recent years has slowed wage growth for American workers, and relatively cheap labor means that businesses haven’t had incentive to invest in technology or equipment that would make their workers more productive. When labor becomes more expensive, Bivens believes that’s when companies will invest: “There’s a strong statistical relationship between real wage growth starting to pick up and businesses starting to get serious about investing in productivity enhancing technology.”
In some ways, this is part of the argument made by business owners who oppose minimum-wage measures and promise that higher wages would mean job losses: When labor gets expensive, employers might opt to invest in robots to do their jobs instead. But according to Bivens, worrying about both productivity and workers being displaced by automation doesn’t make much sense. “I find it ironic that on the one hand, you read the economic statistics about how slow productivity growth is and how weak capital investments is. Then at the same time, you’ll read a lot of stories about how we should be worried about robots putting a lot of pressure on jobs. Those are diametrically opposed. You really have to pick one or the other to worry about,” says Bivens.
The productivity argument, and whether the U.S. economy still has so-called “room to run,” is particularly relevant this week as the Federal Reserve’s policymakers are expected to raise interest rates at its March meeting. Rates went up a quarter of a percent in December, and the financial world will be watching closely for another hike, since the Fed has kept interest rates low for a historically long stretch since 2007, when they were lowered as part of the post-recession recovery effort.
The impending raise has brought up the perennial question of whether the Fed could be making such a move too late or too soon. Monetary policy is the way a central bank changes the cost and availability of money. For the country’s central bankers, tasked with the timing of these important policy decisions, the stakes are high: Raising rates too early can hurt a fragile economy, causing it to slow and dampening recovery efforts. Raising rates too late means money is too cheaply available, and it could overheat an economy, leading to asset-price bubbles and inflation.