Growth of economic productivity underlies improvements in well-being of the economy’s participants. This occurs because the price of goods and services decline in real terms, even as incomes rise.
Thus if you want to know how the participants of an economy are faring over the long term, the most important number to look at is productivity. GDP growth alone can be misleading because growth may come simply from increases in the working age population.
This chart from JP Morgan’s 4Q 2015 Guide to the Markets, showing that US productivity growth in the last decade is the lowest in the post-war period, is the most concerning in the entire document.
- Declines in productivity improving investments?
- Demographic changes?
- Declines in quality or adaptability of worker skills?
- Shifts from manufacturing to services?
- Failure of investments in Information Technology?
- Failure of capital markets to correctly allocate capital?
Or is this simply a bookkeeping or measurement problem? Are we simply unable to measure some forms of value creation, such as from open source software or “free” services such as Facebook or Twitter?