Productivity is a Policy Choice (with Preston Mui)

Episode Summary

Executive Summary: The episode argues that productivity growth depends on full employment, strong investment, and stable supply conditions—the “three legs of the productivity stool.” Economist Preston Moy explains why the late 1990s saw exceptional productivity and rising wages, how current policy can recreate those conditions, and why maintaining labor-market strength and targeted public investment is key to future growth.

Main Topics: What productivity and full employment mean (Priority: 5/5): The hosts define productivity as output per worker-hour and full employment as a tight labor market where workers can find jobs, bargain for wages, and move to better jobs. Why the 1990s were a productivity boom (Priority: 5/5): Moy’s report identifies three drivers of late-1990s productivity: full employment, a surge in fixed investment, and stable supply-side conditions that kept inflation and rates low. Policy lessons from the Biden era (Priority: 5/5): The conversation compares current policy to the 1990s, arguing that the IRA, infrastructure spending, and industrial policy can support productivity if implementation is strong and labor markets remain tight. How full employment raises productivity (Priority: 5/5): The guests argue that tight labor markets improve worker skills over time, boost demand and business investment, and force firms to adopt labor-saving technologies. Supply-side risks and inflation control (Priority: 4/5): Moy emphasizes that housing, energy, healthcare, education, and critical minerals are key bottlenecks that must be actively managed rather than left to luck. Monetary policy and the Fed (Priority: 4/5): The discussion criticizes overly tight rates and argues the Fed should normalize policy sooner to protect employment and sustain productivity-enhancing investment. Distribution and political stakes (Priority: 4/5): The hosts stress that productivity gains must be broadly shared; otherwise, inequality and instability worsen, and future policy could be reversed by hostile administrations.

Key Arguments: The late 1990s are the best recent model for productivity growth because they combined full employment, strong fixed investment, and low supply-side inflation. Full employment is not just low unemployment; it includes job mobility, wage growth, worker bargaining power, and the ability to leave bad jobs for better ones. Higher wages can increase productivity by forcing firms to invest in labor-saving technology and by strengthening consumer demand for business output. The Biden administration’s industrial policy is broadly aligned with a middle-out productivity strategy, but implementation and continued labor-market strength are essential. Public policy should actively manage supply-side costs in energy, housing, healthcare, education, and critical minerals instead of relying on market luck. The Fed should not keep rates tight longer than necessary, because high rates can suppress housing, R&D, and other productivity-enhancing investment. Productivity gains are politically sustainable only if workers broadly share in the benefits; otherwise, inequality and backlash increase.

Data Points: Late-1990s non-farm labor productivity growth: just above 3% - Preston Moy cited this as the strongest recent period of productivity growth. 2010s non-farm labor productivity growth: just over 1% - Used as contrast to show the weak productivity decade after the Great Recession. 2023 productivity growth: 2.6% - Recent uptick that prompted discussion about whether a 1990s-style boom is returning. Prime-age employment rates in the 1990s: highest ever seen - Example of the full-employment condition that supported productivity growth. Fed rate projections: 17 out of 19 members see unemployment rising no more than 0.2% - Hosts cited this to argue the Fed has become less pessimistic about labor-market damage. Henry Ford turnover reduction: from nearly 400% to about 40% - Illustrated how higher wages can improve productivity and quality by reducing turnover. Full employment threshold discussed: under 4% unemployment - Hosts used current labor-market levels to argue the economy is near full employment. Historical natural unemployment estimate: 5.5% - Referenced as an outdated Fed estimate from earlier decades. Decline in housing investment: multifamily starts and permits have fallen off a cliff over the past year - Moy flagged this as a risk to future supply and rent inflation. R&D growth: negative for the past two quarters - Raised as a warning sign for future technological progress.

Pivotal Quotes: "Middle out economics is the answer." — Nick Hanauer: Opening framing of the show’s economic philosophy. "The three legs of the productivity stool." — Preston Moy: His summary of the conditions needed for strong productivity growth: full employment, fixed investment, and stable supply-side conditions. "The Dream of the 90s is Alive in 2024" — Preston Moy: Title of his report, used to argue that policy can recreate the 1990s productivity environment.

Implications: If policymakers preserve full employment and keep investing in supply, clean energy, housing, and R&D, productivity could accelerate and wages could rise broadly. But tighter monetary policy or a hostile political reversal could stall the boom and deepen inequality.