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Investment, Productivity, Wages, and Economic Prosperity

Here’s a simple and fundamental question: What is economic growth?

And here’s a simple answer: It’s when there’s more national income.

That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

  • More people.
  • More output per hour, also known as increased productivity.

This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

…one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

I then point out that we have a problem.

…when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

But I also share suggestions for policy reforms that would lead to higher productivity.

…tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

Seems like the lesson should be obvious.

P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

9 Responses

  1. Excellent analysis.

    Would be very valuable to see how we compare with other developed nations.

    There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


  2. Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

    Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


  3. You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


  4. on August 18, 2017 at 5:31 pm John Michael Wagner

    Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

    I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

    In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


  5. on August 18, 2017 at 5:33 pm John Michael Wagner

    Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


  6. Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

    Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

    Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

    Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


  7. on August 19, 2017 at 6:03 am Richard Smith

    “What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.”

    The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


  8. on August 19, 2017 at 8:09 am John Michael Wagner

    One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

    Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

    Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


  9. on August 19, 2017 at 8:10 am John Michael Wagner

    Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


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    Investment, Productivity, Wages, and Economic Prosperity

    Here’s a simple and fundamental question: What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.

    That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

    • More people.
    • More output per hour, also known as increased productivity.

    This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

    And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

    Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

    And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

    …one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

    I then point out that we have a problem.

    …when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

    But I also share suggestions for policy reforms that would lead to higher productivity.

    …tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

    The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

    Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

    But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

    The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

    I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

    Seems like the lesson should be obvious.

    P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

    After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

    P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

    9 Responses

    1. Excellent analysis.

      Would be very valuable to see how we compare with other developed nations.

      There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


    2. Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

      Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


    3. You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


    4. on August 18, 2017 at 5:31 pm John Michael Wagner

      Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

      I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

      In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


    5. on August 18, 2017 at 5:33 pm John Michael Wagner

      Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


    6. Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

      Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

      Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

      Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


    7. on August 19, 2017 at 6:03 am Richard Smith

      “What is economic growth?

      And here’s a simple answer: It’s when there’s more national income.”

      The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


    8. on August 19, 2017 at 8:09 am John Michael Wagner

      One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

      Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

      Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


    9. on August 19, 2017 at 8:10 am John Michael Wagner

      Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


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    Investment, Productivity, Wages, and Economic Prosperity

    Here’s a simple and fundamental question: What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.

    That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

    • More people.
    • More output per hour, also known as increased productivity.

    This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

    And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

    Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

    And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

    …one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

    I then point out that we have a problem.

    …when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

    But I also share suggestions for policy reforms that would lead to higher productivity.

    …tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

    The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

    Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

    But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

    The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

    I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

    Seems like the lesson should be obvious.

    P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

    After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

    P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

    9 Responses

    1. Excellent analysis.

      Would be very valuable to see how we compare with other developed nations.

      There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


    2. Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

      Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


    3. You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


    4. on August 18, 2017 at 5:31 pm John Michael Wagner

      Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

      I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

      In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


    5. on August 18, 2017 at 5:33 pm John Michael Wagner

      Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


    6. Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

      Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

      Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

      Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


    7. on August 19, 2017 at 6:03 am Richard Smith

      “What is economic growth?

      And here’s a simple answer: It’s when there’s more national income.”

      The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


    8. on August 19, 2017 at 8:09 am John Michael Wagner

      One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

      Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

      Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


    9. on August 19, 2017 at 8:10 am John Michael Wagner

      Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


    Comments RSS

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    Investment, Productivity, Wages, and Economic Prosperity

    Here’s a simple and fundamental question: What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.

    That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

    • More people.
    • More output per hour, also known as increased productivity.

    This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

    And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

    Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

    And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

    …one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

    I then point out that we have a problem.

    …when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

    But I also share suggestions for policy reforms that would lead to higher productivity.

    …tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

    The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

    Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

    But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

    The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

    I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

    Seems like the lesson should be obvious.

    P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

    After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

    P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

    9 Responses

    1. Excellent analysis.

      Would be very valuable to see how we compare with other developed nations.

      There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


    2. Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

      Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


    3. You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


    4. on August 18, 2017 at 5:31 pm John Michael Wagner

      Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

      I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

      In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


    5. on August 18, 2017 at 5:33 pm John Michael Wagner

      Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


    6. Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

      Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

      Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

      Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


    7. on August 19, 2017 at 6:03 am Richard Smith

      “What is economic growth?

      And here’s a simple answer: It’s when there’s more national income.”

      The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


    8. on August 19, 2017 at 8:09 am John Michael Wagner

      One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

      Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

      Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


    9. on August 19, 2017 at 8:10 am John Michael Wagner

      Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


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    Investment, Productivity, Wages, and Economic Prosperity

    Here’s a simple and fundamental question: What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.

    That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

    • More people.
    • More output per hour, also known as increased productivity.

    This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

    And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

    Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

    And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

    …one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

    I then point out that we have a problem.

    …when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

    But I also share suggestions for policy reforms that would lead to higher productivity.

    …tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

    The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

    Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

    But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

    The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

    I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

    Seems like the lesson should be obvious.

    P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

    After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

    P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

    9 Responses

    1. Excellent analysis.

      Would be very valuable to see how we compare with other developed nations.

      There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


    2. Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

      Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


    3. You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


    4. on August 18, 2017 at 5:31 pm John Michael Wagner

      Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

      I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

      In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


    5. on August 18, 2017 at 5:33 pm John Michael Wagner

      Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


    6. Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

      Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

      Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

      Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


    7. on August 19, 2017 at 6:03 am Richard Smith

      “What is economic growth?

      And here’s a simple answer: It’s when there’s more national income.”

      The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


    8. on August 19, 2017 at 8:09 am John Michael Wagner

      One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

      Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

      Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


    9. on August 19, 2017 at 8:10 am John Michael Wagner

      Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


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    9 Responses

  • Excellent analysis.

    Would be very valuable to see how we compare with other developed nations.

    There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


  • Excellent analysis.

    Would be very valuable to see how we compare with other developed nations.

    There are also non-pecuniary things that many people (especially leftists) like to include into a broader definition of prosperity. However these non-pecuniary elements are finite. By contrast, productivity growth is exponential, and thus virtually infinite. In the end productivity growth dwarfs all other factors in determining prosperity — no matter how prosperity is defined.


  • Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

    Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


  • Population growth by itself is not necessarily a good thing. If the individual is less productive than average, the country will still grow, but average productivity will go down. If the individual goes on welfare the growth contribution is negative, because he doesn’t contribute and someone else must manage the welfare process, which detracts from productivity. If he accepts a government or business compliance job, his contributions can be negative, zero, or less than average.

    Looking at the productivity of an individual, productivity almost always goes up, unless government steps in with rules or mandates.


  • You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


  • You can also have huge productivity jumps, say with automation, but if productivity goes up ten times but 10 are unemployed, there is no gain until the 10 find their next employment.


  • on August 18, 2017 at 5:31 pm John Michael Wagner

    Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

    I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

    In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


  • on August 18, 2017 at 5:31 pm John Michael Wagner

    Hi nedlandp. I will party disagree with your comment about population growth. You seem pessimistic on this point. Maybe new workers will possess above-average productivity, instead of below average. Maybe they will invent great new products rather than going on welfare.

    I think it’s reasonable to assume that new workers are average. That’s not positive in and of itself. However, they DO provide two possible sources of improvement. One, the more people, the better the chances for ‘economies of scale.’ Two, the more people, the more chances innovative new ideas will be generated. People are assets, not liabilities.

    In my opinion, population growth is mildly positive for these reasons. Not as positive as historical productivity improvements, but still positive.


  • on August 18, 2017 at 5:33 pm John Michael Wagner

    Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


  • on August 18, 2017 at 5:33 pm John Michael Wagner

    Follow up point on the 10 unemployed by productivity: agree that productivity is messy and chaotic. In the long run, though, those unemployed (in the aggregate) have always found new jobs, and productivity has been a net positive for society.


  • Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

    Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

    Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

    Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


  • Population growth purely by itself is a positive thing for me. More people is more life. I’m not Malthusian.

    Now, population growth with increased total productivity even with lower per capita productivity I’d still argue it’s likely positive. Not only more total life but more total productivity means generally greater overall pace of new inventions etc. Humanity as a whole is better off in the long term.

    Population growth is bad if the new population joins and strengthens the supermajority that burdens the brightest most competent or most motivated minds of humanity with taxes, regulation, redistribution, envy, and general incentive suppressors. Then growth slows down, the exponent decreases, and humanity in the long term misses out on unthinkable levels of extra prosperity.

    Generally, if the extra people can’t help but value immediate finite redistribution over infinitely exponentially compounding growth — then humanity loses out on foregone growth — big time.


  • on August 19, 2017 at 6:03 am Richard Smith

    “What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.”

    The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


  • on August 19, 2017 at 6:03 am Richard Smith

    “What is economic growth?

    And here’s a simple answer: It’s when there’s more national income.”

    The answer DOES not say more national income Per Capita. Not sure why you guys are talking about population or number employed.


  • on August 19, 2017 at 8:09 am John Michael Wagner

    One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

    Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

    Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


  • on August 19, 2017 at 8:09 am John Michael Wagner

    One further comment I forgot to make above: more people also allows more chances for specialization / division of labor, which itself is a driver of productivity.

    Zorba – sure, if all members of the added population are worthless, unproductive, growth-hating redistributionists, then this will be bad. But what if every new person is the exact opposite of this? I’d say more realistic to assume that new population averages out to… average. Which means, I think, new population is a net positive.

    Richard – the article says that GDP is increased when population increases, Nedlandp made a comment that population growth is not necessarily positive. I assume he is implying that the growth rate of GDP per capita is more important than growth rate of total GDP. Hence my response to him that population growth can mildly increase GDP per capita due to economies of scale, more innovative ideas, and more labor specialization. Growth of GDP per capita is a better indicator of prosperity than growth of total GDP, which I assume nedlandp meant.


  • on August 19, 2017 at 8:10 am John Michael Wagner

    Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


  • on August 19, 2017 at 8:10 am John Michael Wagner

    Oh yeah, and clearly we’re talking about it because we’re policy nerds. 🙂


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