American productivity still leads the world
CLAD IN a white bunny suit that leaves only his eyes exposed, S.V. Sreenivasan carefully picks up the slender object that lies at the heart of the global economy, a silicon wafer. But this particular wafer is a little different from most of those from which semiconductors are made: it is fused to a glass plate. Mr Sreenivasan’s team at the Texas Institute for Electronics, a public-private consortium, is working on a $1.4bn research project to make chips which use materials in addition to silicon and which stack components vertically. If successful, it could change the basic architecture of semiconductors. “People keep asking if innovation in the industry will slow down,” Mr Sreenivasan says. “If anything, it’s accelerating.”
What makes the work interesting is not just its ambition but also the provenance of its funding. The biggest single infusion of capital— $840m—comes from the Defence Advanced Research Project Agency (DARPA), a government body that has achieved something akin to legendary status for its roles in inventing the internet, popularising the global positioning system and developing the mRNA vaccines that let the world move past the covid-19 pandemic. “At any moment in time, we’re really just laying a whole bunch of bets,” says Stefanie Tompkins, the director of DARPA.
In the world of economics DARPA is legendary for another reason. It is seen as part of the explanation for why America is not just good at innovation but also why it is a lot more productive than many other countries. In September Mario Draghi, former president of the European Central Bank (and former prime minister of Italy), argued as much in a report for the European Commission about the continent’s slow growth. Pointing to America’s stronger productivity, he noted that one important axis ran from DARPA’s willingness to back risky ideas with public capital to America’s propensity for technological breakthroughs.
In truth it is impossible to ascribe productivity to any single factor, much less a single public agency. DARPA is one element in a heady, complex mix. But there is no question that productivity has enabled much of America’s economic outperformance.
This year the average American worker will generate about $171,000 in economic output, compared with (on purchasing-parity terms) $120,000 in the euro area, $118,000 in Britain and $96,000 in Japan. That represents a 70% increase in labour productivity in America since 1990, well ahead of the increases elsewhere: 29% in Europe, 46% in Britain and 25% in Japan.
Working holiday hours
A common riposte is that American productivity is exaggerated since American workers get much less holiday time than their peers abroad. But when assessed on a per-hour basis the gap remains sizeable: 73% productivity growth for American workers since 1990 versus 39% in the euro area, 55% in Britain and 55% in Japan (see chart). Another criticism is that productivity growth in America has steadily declined over the past couple of decades. That, however, has been true elsewhere as countries have grappled with ageing populations and what had seemed to be a maturing tech landscape. Productivity growth in America remains stronger than in most other economies.
To explain this productivity outperformance, it is useful to break it into a few broad, overlapping categories. The first is investment in capital. American workers, simply put, have more tools at their disposal, both the physical kind such as highways and warehouses and the intangible sort in the form of software. Non-residential investment has run at about 17% of GDP in America since the mid-1990s, consistently higher than the share in large European economies, according to John Fernald of INSEAD, a business school in France. Moreover, much American business investment is the most potent kind: spending on research and development, which sows the seeds for future growth. With the exceptions of Israel and South Korea, America invests more in R&D than any other country, at roughly 3.5% of GDP. China is the one major power that has closed the gap on R&D spending, but it still trails America by a large absolute margin.
America’s overall economic environment, often described as its business dynamism, is a second factor. One way of showing this is the churn rate among its companies, or the share that are created or dissolved in any given year. This has declined somewhat in America but is still nearly 20% of companies annually (roughly half are new businesses and the other half are those that stop operating). In Europe it is closer to 15%, according to the European Centre for International Political Economy, a think-tank. This difference reflects the twin facts that it is easier both for old firms to fold in America and for startups to obtain financing.
To everything (churn, churn) there is a season
Churn allows the American corporate landscape to keep evolving in the direction of more profitable ventures. In 2005 America’s biggest issuers of patents were Procter & Gamble, 3M, General Electric, DuPont and Qualcomm, while in the euro area they were Siemens, Bosch, Ericsson, Philips and BASF, according to Antonin Bergeaud, an economist at HEC, a business school in Paris. In 2023 in America there were four new entrants in its top five: Microsoft, Apple, Google and IBM joined Qualcomm. In the euro area it was almost all the same, with only Bayer displacing Siemens.
The dynamism applies to America’s labour market, too. In any given three-month period about 5% of its workers change jobs. In Italy it takes one year to get the same level of labour turnover. A study in 2020 by the OECD found that among citizens in a large sample of Western countries, Americans were the most likely to move elsewhere for new jobs. Decisions to move may partly stem from things that other countries want to avoid, notably America’s weaker union laws and its more limited support for the unemployed. But dislocation can be productive: those who switch jobs tend to enjoy higher wages than those who stay put, an indication that they have gone to companies and places which are making better use of their talents. The wage premium for job-switchers is especially true for women, youth and people with fewer skills.
Over time all this churn tends to push workers, entrepreneurs and investment towards more productive sectors. That matters because the productivity gap between America and Europe is almost entirely the result of America’s outperformance in a few digital-intensive segments of the economy—the third vital factor behind America’s productivity success. It has done particularly well in tech, finance and professional services such as law and consulting. In other sectors, such as retail sales, European countries often get more out of their workers. The point is thus not that every facet of American life is more productive, but that America is strong in the sectors that have done the most to generate growth and wealth over the past few decades.
The underlying cause of America’s tech superiority is the country’s vibrant innovation lifecycle. It starts with its universities, helped by their ability to attract many of the brightest minds from around the world. Public support for research is robust. Financing for young companies is plentiful. And companies face few regulatory hurdles to scale up. It is not that American regulators are lax but that they compare favourably to many of those elsewhere in the world. Europe still fragments along national lines. Japan has a way to go in shaking up its stodgy corporate governance. In China the Communist Party has set its own cause back by throttling its once-vibrant private sector.
The very success of America’s tech giants has provoked concern that they have become too powerful, and that their dominance is harming the economy and stifling its dynamism. Thomas Philippon of New York University has documented the rise in corporate concentration in America since the 1980s: big companies have taken a larger and larger share of corporate revenues; corporate profits in general have risen as a share of economic output; and companies, especially in the most concentrated sectors, have transformed less of their profits into new investments and more into share buybacks. Added up, that threatens to be a recipe for slower productivity, weaker growth and higher inequality. So influential is this assessment of the economy that it is a motivating force for the Biden administration’s aggressive application of antitrust laws, aimed at curtailing the reach of big tech.
Yet the case that concentration has reached harmful levels is no slam dunk. Economic theory suggests that monopolists (or oligopolists) will abuse their clout to reduce production and raise prices. Sharat Ganapati of Georgetown University has found pretty much the opposite relationship in four decades’ worth of American census data: industries with rising concentration have also been the most productive, and the companies that fared best in them did not raise prices. One interpretation is that America’s corporate champions have excelled by being more efficient, thereby benefiting consumers and the wider economy.
New and improved products
Data on concentration are also complicated. Studies typically focus on entire industries—the way that, say, Procter & Gamble (P&G) is a powerhouse in consumer goods. But looking at the economy in terms of products, rather than industries, presents a different picture—one that is arguably more consistent with everyday realities. Looked at on a product-by-product basis, concentration is actually declining in America; established brands are moving into new niches, according to research by C. Lanier Benkard of Stanford and colleagues. P&G may be big in consumer goods generally, but it has reduced concentration in the rubber-glove market with a new Mr Clean product.
And corporate America is getting into areas that are more consequential than dish-cleaning. Economists have long observed the duality between national and local competition. Home Depot’s heft seems to reduce competition on a national scale, but when it enters a town that previously had just one hardware store, it represents a new competitive force. A similar dynamic may be playing out as tech giants move into markets which are conceptually, rather than geographically, new to them. Companies like Amazon and Alphabet offer one of the best hopes for shaking up America’s high-cost health-care sector as they get into primary care, diagnostic services and more.
If tech companies manage to achieve dominance across many markets by being hyper-efficient competitors, then proceed to block new challengers, the worst fears about them might prove justified. For now, though, a recent examination of the evidence by Carl Shapiro of the University of California at Berkeley and Ali Yurukoglu of Stanford put it well: the rise of concentration across American industry looks more like competition in action than competition in decline.
What is more, many excited observers think the latest wave of innovation emanating from the tech giants—the rise of artificial intelligence (AI)—will herald a return to faster productivity growth both in America and abroad. In a study last year, economists at Goldman Sachs, a bank, concluded that AI could drive a 7% increase in global GDP over a decade. And they estimated that America would reap a bigger boost to its growth than any other country by virtue of being at the frontier of technology, both pushing AI forward and adopting it extensively. A healthy dose of scepticism is in order. After reviewing literature on how AI works and how ideas spread, Daron Acemoglu of MIT came to the more sedate conclusion that it will boost GDP by about 1% over the next decade.
Whatever the eventual outcome, the rise of AI has served to underscore just how formidable America remains as an engine of innovation. It accounts for more than half of global private-sector investment in AI. And it is not just the private sector. DARPA is all over the boom, funding dozens of projects that use AI, from beefing up cyber-security to turning machines into more trustworthy partners for their human operators. It is, once again, helping write the next chapter in the story of American productivity. ■