Key Driver 1 - Productivity
Krugman starts by providing a definition of standard of living: “For the economy, the important things — the things that affect the standard of living of large numbers of people — are productivity, income distribution, and unemployment. If these things are satisfactory, not much else can go wrong, while if they are not, nothing can go right”. These are Krugman’s First-Order Variables (FOV), from which second-order issues, such as inflation and international competitiveness, derive.
Krugman argues that, from the viewpoint of the mid-to-late 1990s, we are in trouble WRT the US standard of living as we are seeing a slowdown in productivity, as well as an increase in income inequality relative to the post WWII era. A return to cheap energy prices (relative to the 1970s oil crisis) did not boost productivity. Reagan’s deregulations, while not “an abject failure,” did not produce meaningful gains in productivity. In 1993 the Clinton administration announced that it would provide $4B in technological subsidies – Krugman sees this as “pocket change in a $6T economy”.
So what can we do to fix productivity growth if energy prices, deregulation, and (meager) technological subsidies aren’t working? Krugman says the answer is simple: “suffer”. Consume less now, invest more resources in capital for workers and education for children. At the policy level, this translates into a few low-risk political solutions: the federal government can encourage higher educational standards and support industry research consortia. But ultimately he concludes that fixing productivity, the most important factor that almost singlehandedly determines standard of living, is “not a policy issue, because we are not going to do anything about it.” Bummer!