From e21 – John R. Dearie, Executive Vice President at the Financial Services Forum, is co-author, with Courtney Geduldig, Vice President of Global Regulatory Affairs at McGraw Hill Financial, Inc., of “Where the Jobs Are: Entrepreneurship and the Soul of the American Economy,” published by John Wiley & Sons.
Three reports issued in recent weeks provide important, and worrisome, insight into the long-term health of the U.S. economy. If policymakers carefully consider each–and understand the connections between them–the U.S. economy stands a far better chance of returning to historical rates of economic growth and job creation.
Report #1: On May 7th, the Labor Department reported that productivity–output per hour worked–declined at an annual rate of 1.7 percent in the first quarter of this year. After growing at an average annual rate of about 2.5 percent since 1948, productivity growth has averaged only about 1.1 percent since 2011–less than half the historical trend.
The flagging rate of productivity growth is cause for concern because productivity drives economic growth and rising standards of living. In 1956, Nobel Laureate economist Robert Solow demonstrated that most of economic growth cannot be attributed to increases in capital and labor, but only to gains in productivity–gains driven by innovation. As businesses and workers become more efficient, costs fall, profits and incomes rise, demand expands, and economic growth and job creation accelerate.
Throughout modern economic history, entrepreneurs and the start-ups they launch have been the principal source of the innovation that drives productivity gains. For example, most of the radical innovations of the past 100 years–electrification, the railroad, the automobile, the airplane, the telegraph and telephone, air conditioning, the computer–the truly “disruptive” innovations that dramatically enhanced productivity and fundamentally re-made the economic landscape, came from entrepreneurs. Relatedly, recent research has demonstrated that start-ups have also accounted for virtually all net new job creation over the past three decades.
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