“Last December (2017), Republicans relied on the support of conservative economists who predicted that the party's corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along…Proponents of the bill nonetheless claimed that we would see enough additional investment to boost growth by 0.4% per year. That implies an increase in annual investment of roughly $800 billion – that is, an increase from 17.5% to about 21.5% of GDP. (J.B. Bradford Delong, The Great American Tax Heist Turns One, Project Syndicate, Dec 14, 2018) 

“There are several effects of the Tax Cuts and Jobs Act that are quite clear. First, there is a large tax cut in the short term. According to the Joint Committee on Taxation, the nonbusiness individual income tax provisions will cost around $60 billion in FY 2018 and around $160 billion in FY 2019. The business provisions have a similar revenue cost. So, to a first approximation, this is a large, stimulative tax cut in the short term…And these tax cuts are tilted toward those with the highest incomes. Tax Policy Center estimates indicate that the short-term tax cuts as a share of after-tax income increase throughout the population as income gets higher.” (Mark J. Mazur, Reflections On The Tax Cuts And Jobs Act, Joint Economic Committee Hearing on “Unleashing America’s Economic Potential” April 11, 2018)

Productivity in the US, or output per hour of work, has been unusually weak throughout the current economic recovery. Moreover, analysts have been unable to come up with definitive reasons for the productivity growth slowdown.

The productivity growth lag is very important, since productivity and the average standard of living (output per person) are almost identical economic terms. Indeed, the growth in labour productivity, or output per worker, is probably the single most important variable in an economy.

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.

Perhaps some of the answer is also to be found in the growing economic inequality within the US.

Ironically a major justification of the Trump tax cuts, which were very generous to corporations, was that it would improve the competitiveness of American industry, and thus productivity growth would also speed up.   

However, this writer does not believe that the key reason behind the longer-term slowdown in productivity was because American taxes were too high.

While it is still very early in the game, it is hard to see a major boost in US productivity coming from the tax cuts.