Imagining Tax Debate Was In The Real World: Suppose Productivity Growth Is Already Up

The main claim of proponents of the Republican tax bill is that lowering corporate taxes will lead to a surge in corporate investment. This is supposed to lead to more rapid productivity growth and therefore higher wages.

As those of us who are fond of data have pointed out, the world doesn’t seem to work this way. There is very little relationship between after-tax profit rates and investment. In fact, the period of strongest investment was the late 1970s and early 1980s when after-tax profits were at their post-World War II low, while the current period of very high profits has been associated with lackluster investment. This leaves little reason to believe that cutting the corporate tax rate will have much impact on investment. (Of course, we also tried this trick in 1986, also with little impact on investment.) 

But there is another aspect to this story that folks in the reality-based universe should be thinking about. Productivity growth has been dismal in recent years, in spite of all the talk about robots taking our jobs. (Pundits aren’t paid to know anything about the world.) Over the last five years, productivity growth has averaged less than 0.7 percent annually. That compares to rates of close to 3.0 percent from 1995 to 2005 and also during the long golden age from 1947 to 1973.

However, this may be changing. Last quarter, productivity rose at a 3.0 percent annual rate. As everyone familiar with productivity data knows, the best thing to do with quarterly number is to ignore it. Nonetheless, a faster trend has to start somewhere and what is striking is that we seem to be on a path for another strong number for the fourth quarter.

We still don’t have much data in for the fourth quarter, but the latest GDP growth projection (November 9) from the Atlanta Fed’s GDPNow is 3.3 percent. If we assume that hours worked grow for the quarter at their 1.4 percent annual rate for the last year, this translates into 1.9 percent productivity growth. That’s a notable uptick from the 0.7 percent rate of the prior five years.