Faster U.S. productivity growth is on tap
Este artículo está disponible sólo en inglés.
Economic challenges such as rising inflation, supply chain disruptions, and productivity slumps all can result from a prolonged period of technological stagnation. But what if such supposed stagnation is a normal part of the innovation cycle, one where the most consequential discoveries often take the longest to have economic significance?
That’s the trend Vanguard researchers found when studying global patterns of research and development for a recent Megatrends research paper, How America Innovates (15-page PDF, issued June 2022). “It can take years, often decades, for new discoveries to find their ultimate purpose,” said Adam J. Schickling, a Vanguard economist who coauthored the paper. “A groundbreaking technology can exist but not manifest in economic statistics until an industry or firm finds a commercial application.”
Where have all the innovations gone?
Consider this: in 1952, a botched experiment at glassmaker Corning led to the creation of an ultrathin, ultrastrong, ultraclear panel that no one seemed to need.1 Half a century later, that unheralded component transformed the consumer electronics industry. It made possible the touchscreen technology now ubiquitous in smartphones, notebooks, tablets, and TVs.
When it comes to innovation, what appears to be stagnation of new ideas sometimes proves instead to be that long stretch between the discovery of an extraordinary idea and its commercial use. As prior Vanguard research has found, there were similarly long lags between the invention and widespread adoption of the telephone, the lightbulb, and even the personal computer.2
The new report, written by Schickling and his colleagues Joe Davis and David Diwik, reconciles the lackluster official productivity growth of the past decade with the notion that invaluable discoveries were indeed in development. They just hadn’t all yet expanded into commercial applications.
“We’ve seen incredible advancements in the food science, biomedical engineering, and material science spaces,” Schickling said. “The creation of biodegradable food packaging may reduce world wide material pollutants. Medical-detection wearables may soon be able to detect health issues well before the onset of visible symptoms. Solar technology is expanding into everyday materials like paint and textiles, which can dramatically enhance our ability to capture reusable energy.”
These nascent technologies have yet to grab a substantial commercial foothold, but they and other still-undeveloped technologies may be on the precipice of reshaping our economic landscape.
The link between innovation and economic expansion
New technologies free people from less productive tasks (browsing grocery aisles, driving to the mall), empowering us, if we so choose, to focus on grander endeavors (the genetic mapping of viruses, the enhancement of crop yields). Still, research, development, and the production of new ideas are costly. Corporations are reluctant to invest in technologies during times when labor is cheap. That’s when it might be less expensive to boost output by hiring more workers as it was right after the 2008 global financial crisis.
“Ultimately, you need innovation to enable workers to produce more with less,” Schickling said. “Expecting more from workers without technological innovation is not usually a sustainable productivity model.”
Enter the current historically tight labor market in the U.S. and abroad. The U.S. leisure and hospitality industry alone is short 1.5 million workers. There is immense global competition for workers across many industries, which increases the cost of labor. “Companies that want to continue to operate at full capacity under these conditions may be well served by an investment in productivity-boosting technologies,” Schickling said.
The combination of burgeoning research and very tight labor conditions leads Schickling and his colleagues to expect an average U.S. GDP per capita growth rate of 2.0%–2.5% from 2020 to 2030. That would be a pace unseen for decades.3 It also would be a positive development for wage growth, asset returns, and broader economic opportunity.
U.S. GDP growth is riding the productivity wave
Sources: Vanguard calculations, based on data from the U.S. Census Bureau, Thompson Reuters, the Federal Reserve Bank of St. Louis FRED database, and Clarivate Web of Science.
What’s more, productivity growth can temper rising inflation and the economic sensitivity to higher interest rates. As new technologies reduce manufacturing costs and time to market, companies are able to produce more outputs with fewer inputs. “Those inputs could be financial capital, labor, or commodities,” Schickling said. “In any case, productivity growth is the natural antithesis to inflation.”
As shown below, the GDP response to rising interest rates varies depending on the productivity environment. Economic growth is less sensitive to rising rates during a period of higher productivity growth.
Higher productivity buffers GDP growth from rising interest rates
Notes: Year-over-year GDP growth rates fluctuate less when productivity growth is higher. A higher-productivity regime is when the moving three-year average growth in total factor productivity (TFP) exceeds the prior moving three-year average. A lower-productivity regime is when the moving three-year average growth in TFP falls below the prior moving three-year average. A basis point is one-hundredth of a percentage point.
Sources: Vanguard calculations, based on data from the Federal Reserve Bank of St. Louis FRED database from December 31, 1961, to December 31, 1999.
Still, there are economic, demographic, and geopolitical risks that could affect long-term productivity patterns. Economic uncertainty, an aging workforce, and global political tensions can all impact the proliferation and commercial use of new ideas. At the same time, an increasingly globalized economy has accelerated international knowledge sharing, diversified the composition of research teams, and, our researchers believe, increased the pace for innovations to find commercial applications.
1 Gardiner, Brian, “Glass Works: How Corning Created the Ultrathin, Ultrastrong Material of the Future,” Wired, September 24, 2012, https://www.wired.com/2012/09/ff-corning-gorilla-glass/.
2 See Davis, Joseph, Qian Wang, Andrew Patterson, Adam J. Schickling, and Asawari Sathe, 2020. Megatrends: The Idea Multiplier: An Acceleration in Innovation is Coming, Valley Forge, Pa.: The Vanguard Group. (20-page PDF, issued December 2019).
3 Real GDP per capita growth was 1.51% from 2010 to 2020, according to the U.S. Bureau of Economic Analysis.
Additional Vanguard Megatrends research:
• The Economics of Climate Change (20-page PDF, issued April 18, 2022)
• A Tale of Two Paths: The Future of China (27-page PDF, issued September 28, 2021)
• The Deglobalization Myth(s) (12-page PDF, issued September 23, 2021)