Forget Income Inequality – This Is the Key to Better America’s Economic Future

Income inequality, the impact of trade on jobs and taxation — these key issues are front and center for Hillary Clinton and Donald Trump in their campaigns for president.

But there’s one major economic concern both candidates are neglecting: productivity.

The measure of economic outputs from economic inputs, increased productivity is the key to higher wages and social mobility. Unfortunately, today, America is losing the productivity battle. And in a global economy, that’s a battle we can’t afford to lose.

The challenge we face is significant. According to the Department of Labor, between 2000 and 2007, productivity in nonfarm sectors of the economy increased by 2.6 percent annually. But between 2007 and 2015, that rate halved to 1.3 percent. Things seem set to get even worse. In the second quarter of 2016, nonfarm productivity actually fell 0.5 percent. That’s the third consecutive quarter of declining productivity.

This matters. In a free market economy, where inputs exceed outputs, real incomes will stagnate. But while economists offer varying explanations for the sustaining decline in U.S. productivity, one problem is clear: we are not innovating enough. Where in the early 2000s America witnessed the formative establishment of online businesses such as Amazon and Google, in more recent years the web industry has experienced less lucrative innovation.

Another issue is global competition. In recent years, as China and India have replicated U.S. industries in areas like computer construction and medium-advanced manufacturing, the ability of U.S. workers to earn good returns on their work has declined. Some, like Trump, suggest that the best way to address this challenge is to engage in economic protectionism. If tariffs are put on Chinese goods, they say, Americans will buy more American goods and thus protect American jobs and wages from decline.

Today, America is losing the productivity battle. And in a global economy, that’s a battle we can’t afford to lose
But this is fanciful. As I’ve written for Opportunity Lives and argued with Pat Buchanan, protectionism is immoral. It hurts the poorest in our society by increasing their outlays for basic goods and services. Crucially, it also encourages a longer term economic slowdown by fixing resources in inefficient industries. While we must assist displaced workers into retraining schemes that secure the economic future of their communities, we must also accept that it makes no economic or moral sense to use tariffs to return t-shirt factories to America. Instead, the future will be won by doubling down on those areas where America retains a competitive advantage. High-technology aircraft parts, professional services and computer software offer three examples.

To boost productivity, we’ll also need a revival of American innovation. If we’re able to develop the new iPhone-type gadget, or a better way of extracting oil and gas, we’ll be able to sell those developments to the world. Fact is, innovation goes hand in hand with productivity and higher wages.

But we also need to stop wasting productive potential in inefficient areas. For a start, we should dramatically simplify the corporate tax code and encourage investment in products and people instead of tax lawyers and accountants. We should also cut the regulations businesses face. Government should also force greater competition onto massive industries such as transportation infrastructure and health care. Doing so would invest capital inputs more efficiently and over time, would boost outputs.

Still, there’s one final area where we need to improve productivity: skill-improvement based education reform. If we can develop a workforce better able to compete with the most advanced economies in the world, we will attract global capital. There is a reason that college graduates earn more than high school graduates who lack technical skills qualifications. And there is a reason why the private sector is more productive than government. In both cases, higher skills yield a more productive return on investment.

We can boost productivity. But first we must end our pursuit of easy populism. From the right, Trump promises to bring uncompetitive jobs back to America. And from the left, Clinton reinforces the lie that low-skilled jobs may be preserved through economic redistribution (a lie that is proven by the failed European socialist project — including in Scandinavia). These choices pretend that positive reforms can be easy. The truth is harder, and it is rendered in declining productivity.