By MortazaviBlog on Nov 03, 2006
A recent Wall Street Joural article reports a decrease in productivity growth rate in the U.S. from an average of 2.8% in the last decade to 1.3%. While we commonly hear that productivity can grow by the rise in population and by the application of technology, we should also remind ourselves that organizational and process innovation as well as a healthy social infrastructure can also have a tremendous impact on economic growth. Productivity growth represents "a crucial factor in controlling inflation, boosting profits and improving living standards."
Productivity also matters to policy makers at the Federal Reserve. If it slows, the economy's growth potential -- the "speed limit" at which it can grow without stoking inflation -- also declines. Recently, Fed staffers have been nudging down their estimate of the economy's future growth potential, a move that reflects lower estimates of productivity growth. In the current environment, that means the Fed might have to keep interest rates higher for longer to keep inflation under control.