The Missing Link in our Economic Recovery – Productivity

In Friday’s US print edition of the Financial Times there is an article called, ‘Eurozone needs to look beyond monetary policy‘. If you had missed it Mario Draghi, the ECB president, has signaled in the last day or so that the ECB is open to increased quantitative easing (QE) and possibly lower interest rates. This is an attempt to redress the balance between a slowing economy in China and a US Fed that delayed raising rates. In other words it is beggar-thy-neighbor process in a race to the bottom. And Mr. Draghi is thinking the euro needs a new round to help improve Europe’s position.
The article suggests that while QE and (negative) interest rates are valid monetary polices to work with, there are two others that really have not been focused on by either the European or the US authorities. They are targeted infrastructure expenditure and productivity. The IMF have suggested the former quite forcefully and have reported that even some increased public debt might be worth the investment. But the policies and actions related to productivity are not being promoted by governments and so are not reported in the news at all.  

Productivity, and specifically IT driven productivity, has not been growing as well as it has in the past, nor as fast as it needs to in order to throw off the kind of growth our economy needs to mask the issues surrounding the politics of redistribution and the growing debt challenges. With good growth we can cope with all manner of issues that our politicians are unable to solve. Yet with meager productivity improvements, the economy is left stagnant and we find ourselves in the situation we are in now.  

From my work in the IT industry I can see that individual body of the firm is alive and well and seeking its own individual improvement through whatever means at its disposal. But as a whole, the soul of the firm is tired after years of regulatory and political onslaught. We need change if we are to help the whole economy rather than leave it to individual firms to thrive in spite of our systems.

There are a range of policies that could be enacted that would help drive productivity and so help grow the economy from a demand side of the equations. These range from the political (less likely to be agreed) to the financial (some chance, at least):

Educational reforms:

  • Eliminate the expectation that university is for all – it never was meant to be
  • Increased support for international visa’s to allow those that graduate to stay and find jobs in America
  • Increased vocation collaboration at the local level – not mandated at the federal level (since collaboration has to take place on the ground and is dictated to by which firms operate where, not by lobbyists in Washington)
  • More productivity based metrics and motivations for teachers, not to reduce standards to get more “passes” but reduced red tape to allow teachers to try their own methods and monitor/reward the successes and replace those that fail (the Unions need to get out of the way of progress)

Tax reform

  • increased tax credit for all forms of R&D investment including capital investment
  • A tax holiday (2 years?) to allow firms to repatriate foreign cash reserves when used to R&D investment only
  • Increased tax write off for education and training programs
  • Increased tax credits for industry and university collaboration
  • Reduced red tape, regulation and tax rules for start up and small firm operations in the first 3 years of operation

Targeted spending

  • Fund state level allocation of federal funds for well publicized infrastructure projects. They need to be public to ensure politicians don’t “pick their favorite winners” and they should be accountable for the selections
  • Increased public school investment where results are improving. Reduced funding for public schools where results fall, after a probationary period. Devolve this task to state level but monitor at federal level for oversight only

These are just a few ideas. I realize these are not directly related to IT, but they are directly related to how firms operate and behave, and IT plays a key role in how such behavior change is supported. IT has its own role to play – but the garden has to be fed and watered. And right now, IT is really only being exploited by individual firms. We need to create an environment that will unleash the creative, invisible hand of the entrepreneur. Such an innovator, in this current age of digital business, will create new and fast growing firms and industries. I think we can all agree that would be a good thing.

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