It looks like Larry Summers will be the new Assistant to the President for Economic Affairs and head of the White House National Economic Council (NEC). The NEC is the President's economic coordinating body. As the head of the NEC (the President is the actual Chair, but Assistant to the President chairs the meetings in his absence), Summers will be a major voice on economic policy. Given this role, I though we should go back to what he wrote a month ago in the Financial Times:
Economists do not understand what drives productivity growth very well. However, we know these facts: productivity grew rapidly after the second world war and then sometime between the late 1960s and mid-1970s it slowed dramatically only to re-accelerate to record levels in the mid-1990s. Unfortunately, even before the downturn, underlying productivity growth appeared to be slowing.
The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period. Eventually their impact dissipated and, as energy costs rose, growth slowed until the information technology revolution kicked in during the 1990s. Unfortunately, the IT supply shock that powered the economy in the 1990s and early part of this decade appears to be diminishing.
So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.
I had a chance a couple of weeks ago to ask Summers about this. In his answer it became very clear that he understood the need to action on the microeconomic level to boost innovation and productivity. Of course, it may have helped that this occurred at the National Academy of Sciences - where he was taking over as the Chair of the Board on Science, Technology and Economic Policy (a position he will now have to give up).
So I am optimistic about the innovation and productivity agenda. President Obama's economic team will have to confront our immediate economic crisis. But if Summer's earlier words are any indication, the short term action should help feed long term solution.
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