Distinguished Lecture on Economics in Government: Lessons from Past Productivity Booms

T he U.S. economy has been enjoying substantially faster productivity growth for the past eight years than it did over the preceding two decades. From 1995 to 2003, labor productivity rose at an average annual rate of about 3 percent, up from an average annual rate of around 1.5 percent between 1973 and 1995. In both 2002 and 2003, output per hour increased more than 4 percent. The significance of the improvement since 1995 can hardly be overstated, even after one takes into account the possibility that the increases of the past two years in part reflect cyclical influences and thus overstate the underlying trend. If productivity were to continue to rise at an average annual rate of 3 percent, the standard of living in the United States would double roughly every 24 years. If, on the other hand, productivity growth were to revert to an average annual pace of 1.5 percent, a doubling in the standard of living would occur every 47 years. A number of observers argue that the present era of robust trend productivity growth will soon come to an end. Others contend that the potential gains to productivity from the technological advances associated with the computer revolution are far from complete. In assessing the likelihood of these alternative outcomes, one should recognize that periods of strong trend productivity growth, although perhaps novel to many of us, are not new to the U.S. economy. In particular, three earlier periods of strong trend productivity growth stand out from