E The US Tax Reduction Was Supposed To Boost Productivity And Investment; It Hasn't

That is, as productivity speeds up, it increases the standard of living, helps keep consumer prices low, and expands government revenues and lowers budget deficits. As well, in a fully employed economy which is encountering employment shortages, stronger productivity increases real wages and compensates for labour shortages.

In other words, productivity growth is at the core of many of an economy’s problems and prospects.  

The first chart that follows below highlights the relatively slow productivity growth recorded in the US over the nine-year economic recovery.  Productivity has been unusually weak in recent years despite very strong growth in employment and record low unemployment rates.

The second chart (investment as a share of GDP) underscores that capital investment in the US has been weak for more than a decade. In part, this is related to the under-investment in infrastructure, both public and private, a fact that seems accepted by both Republicans and Democrats.

Focusing on recent data, in the third quarter of 2018 US worker productivity slowed and unit labour costs rebounded after posting their biggest drop in nearly four years. Nonfarm business sector labour productivity rose 2.3% in Q3 compared with a 3% gain in the previous quarter.

However, a better perspective on recent productivity growth is to compare year over year changes. On that basis, productivity increased by only 1.3% from the third quarter of 2017 to the third quarter of 2018, and unit labour costs rose less than 1% (i.e. 0.9%) over the last four quarters.

What accounts for the longer-term productivity slowing? There is no clear definitive answer, though there are many possible ingredients behind this.

Surely some of this is related to the longer-term shift in the composition of the economy in the direction of services and away from goods production.

As well, some of the answer may be found in the de-industrialization of many parts of the US economy.

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