This is partly because governments have recognized the opportunities in these sectors and duly stepped up their game. The fiscal programs coming out of the pandemic have been far more aggressive than in the past. Commitments to invest in infrastructure (including digital), science, and technology are expanding, not just in the United States and China, but also in Europe, across the digital, biomedical, and greentech sectors.
Moreover, policymakers seem to understand that deficient demand has negative effects not only on employment but also on the incentives for adopting new technologies. Most governments thus are eager to ensure that the economy is running at high intensity without demand-side headwinds holding back growth and employment.
Given these factors, there is a reasonable chance that the 15-year negative trend in aggregate productivity growth—and hence overall real growth—will be reversed. Powerful new general-purpose technologies are coming online, and the pandemic has increased adoption and learning in previously lagging sectors. This is crucial, because productivity growth at the aggregate level requires not just widespread availability of the necessary technologies, but also their broad diffusion.
Particularly important is digital adoption by small and medium-size businesses and lagging sectors. In India, part of the digital transformation involves equipping millions of small retail businesses and the related supply chains with technological solutions, as opposed to having large entities sweep them away, causing potentially massive job disruption.
The distribution of income is another key factor in productivity growth. If incremental income continues to flow mainly to high-income individuals and the owners of capital, that may be good for asset prices, but it will be bad for demand, and hence business investment and productivity.
At least in the US, President Joe Biden’s fiscal plans—which include infrastructure investment, changes in taxation, and a higher minimum wage—are designed to restore middle-income jobs and boost incomes for low- and middle-income households.
As a recent study by the McKinsey Global Institute sets forth, the digital transformation may be broad enough that it will help to raise overall productivity growth substantially. For example, innovation in delivery of primary health care (previously a lagging sector) will likely show up not just in the productivity data for that sector, but also in other important measures of performance, including overall health outcomes and quality and timeliness of care.
As for the decarbonization agenda, some might argue that this will have a small or even slightly negative immediate impact on growth and productivity. But on this issue, especially, one should be mindful of the relevant time horizons. Whatever the short-term effects of an expanded green investment agenda, the goal is not to elevate short- or even medium-term productivity. The point, rather, is to avoid or reduce the risk of a massive negative shock to productivity (among other things) in the long run. The present value of green investments thus can be very high even if the impact on short-run flow measures of productivity is small.
Michael Spence, a Nobel laureate in economics, is professor of economics emeritus and a former dean of the Graduate School of Business at Stanford University. He is senior fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.