Washington, D.C. – Today, The Center for American Progress released “Ignoring Productivity at Our Peril,” a new report authored by Dr. Christian Weller and Amanda Logan. The virtuous cycle of higher investment, rising productivity growth, and growing income helped lift almost all economic boats in the late 1990s. Since the turn of the century, however, investment growth has been anemic, productivity growth has declined, and income growth has stagnated. A virtuous cycle is in danger of becoming a vicious cycle. Slow income growth does not give business executives an incentive to invest more money in growing their businesses, which in turn hampers productivity growth, thereby reducing future income growth.
Our national economy is not necessarily locked into such a vicious cycle, but government policymakers are currently ignoring these trends at our peril. This report reviews the existing evidence on business investment and productivity growth and concludes the following:
- Productivity growth has slowed since the 1990s
- Business investment has been low
- The recovery in investment was a result of a building boom and not an equipment gain
- Net investment as a share of GDP has been declining
- Little investment in the knowledge-based economy
- Businesses used money for share repurchases and dividends instead of capital expenditures
- Consumption growth did not provide sufficient incentives for businesses to invest
- Investment and productivity growth may be linked
- Business investment could replace consumers as the driver of the economy
Boosting business investment to overcome indications of a vicious productivity cycle taking hold in our economy would have positive effects for the economy both in the short term and the long term. In the immediate future, faster investment growth could give the economy a much needed boost as consumer spending slows in the wake of a massive debt run-up and as households concentrate on repaying their record-level debt. Over the long term, faster investment growth could help lay a stronger foundation for innovation—the key but elusive measure of our nation’s overall competitive advantage in the global economy.
Policymakers, however, face a dual challenge. Businesses will not invest unless incomes rise faster than they have recently, which means policymakers need to ensure that workers can see more gains from a growing economy in the form of faster job growth and higher wage growth. At the same time, policymakers must create additional incentives for companies to invest in new technologies appropriate for a creative U.S. economy that remains on the cutting edge of global innovation.
This new report will examine the links between investment, productivity, income, and economic growth, and consider some worrying trends in all four of these interconnected arenas. It also details why more robust business investment growth and higher income growth are necessary for our economy to spark innovation and new economic opportunities for employers and employees alike.
Read the full report here.