The chickens and eggs of productivity

Productivity has slowed to a crawl in most advanced economies.

U.S. productivity growth averaged a meager 0.5% in this expansion phase (2011–2016); six times lower than the 3% pace of 1996–2005, and almost five times lower than the long-term average of 1947–2007. Most other advanced economies have suffered a similar slowdown.

Rebooting productivity is the most important economic challenge we face today.

Weak productivity leaves no room for strong wage growth, holding back living standards. With the labor force increasing slowly because of population aging, weaker productivity means poor GDP growth, so advanced economies keep losing ground to emerging markets: twenty years ago, advanced economies accounted for 60% of the world economy; today their share has dropped to 40%. Slow GDP growth also makes it harder to reduce debt burdens — especially with inflation stubbornly low.

Why is productivity growth so poor? We are in a golden age of innovation, with advances in artificial intelligence, robotics, precision medicine, advanced manufacturing. Why is none of this helping?

Innovation can be a spark of magic, but turning it into productivity takes hard work. Companies need to invest to incorporate the new technologies into their capital stock; retrain and redeploy workers; adapt processes and change managing practices. The more disruptive the innovation, the deeper these changes need to be. And to boost overall productivity growth, new technologies need to scale across the economy.

This has not happened yet.

Investment has lagged in the recovery: after a post-recession rebound, U.S. real private investment (excluding residential real estate) decelerated sharply in 2012 and the first half of 2013; after a brief pickup it slowed again in mid-2014. As a consequence, private investment averaged only 16% of GDP in this recovery, compared to 19% in the decade prior to the crisis. Weak performance has been notable in the Equipment and Intellectual Property category — a key driver of efficiency and productivity.

Weak investment is not surprising: we have lived in a state of fear. Traumatized by the global financial crisis, we endured a barrage of headlines warning of the next impending disaster: the Eurozone crisis, the U.S. budget cliff, a China crash. We’ve been told to get used to little or no economic growth — secular stagnation.

Businesses took a defensive stance, focused on cutting costs, replacing rather than upgrading.

Weak investment in my view holds the key to understanding the slowdown in productivity growth — and to reversing it.

This assumes the new wave of digital-industrial innovation is transformational. Others argue that it is not — that productivity growth has ground to halt because today’s innovations do not have the same revolutionary, growth-boosting power of electricity and the steam engine.

Augmented Reality glasses can boost productivity by 30%

From what I see on our factory floors, I simply do not believe it. We have piloted augmented-reality glasses that boost productivity by over 30% in our renewables factories; GE aviation produces an increasing number of parts with additive manufacturing techniques (aka 3D printing), cutting costs by 30–60%. And these are just a few examples.

Digital-Industrial solutions are transformational because they open up an entirely new dimension of improvement: data and analytics.

I also think we have reached a potential turning point. U.S. investment accelerated in the last quarter of 2016 and the first quarter of this year, and business confidence surged. Expectations of regulatory and tax reforms fueled optimism, but better confidence in the global growth environment after years of doom and gloom also helped.

Companies are less fearful of a new global recession, but face an environment of slow growth and tougher competition — and have already taken all the obvious steps to cut costs. The only way to gain a competitive edge now is to boost productivity through innovation. And efficiency figures like the ones above speak for themselves. A few years ago the power of digital-industrial innovation was still largely on paper — now it is proven and measured.

For business leaders, the fear of gambling on innovation is being replaced by the fear of missing out if competitors deploy new technologies at a faster pace. In the coming years, the distance between technology winners and losers will grow larger — for both companies and countries.

I discussed the productivity challenge recently with Neil Irwin of the New York Times, and he characterized it as a chicken or egg problem: “Does low productivity cause slow growth, or does slow growth cause low productivity?”

Companies like GE and startups across our economies are laying the golden eggs of stronger productivity. Get them now — if you wait for them to turn into fully-grown chickens you’ll be too late.

Let me know what you think, here or on Twitter. First, though, click here to prove you are not a bad robot.