Friday, February 17, 2012

Why is the middle class stagnating - no innovation


The total factor productivity is a strong measure of overall productivity in the economy. It would include both labor and capital productivity so it serves as a good measure of innovation in the economy. This is not just having workers work harder without compensation which is one form of productivity increase. While the trend was higher during the tech surge, the overall trend is much lower than what occurred during the 50's and 60's. The last 50 years could be considered the Great Stagnation in factor productivity. The last 15 years is better, but not like the old trend line. It is hard to have surges in real income if there is not higher productivity.

Under the Great Stagnation, there will be more fighting over economic resource. Politics will be more important to get your fair share. Government policies should be implemented to improve factor productivity. Innovation should be rewarded. This is a key role of government, not to support big or specific industries but to make sure that innovators are rewarded.

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