Former Member, Council of Economic Advisers

Recent research has shown that well-designed economic policy is a prerequisite for productivity growth, the key source of higher living standards in the long run. Evidence suggests that pro-growth policy has played a large part in America’s recent productivity revival. An OECD study shows that US multifactor productivity has risen about one percentage point since 1995, while productivity growth has fallen in other major countries. Innovations in information technology (IT) have spurred productivity growth, but technological growth alone does not explain performance. Because IT flows freely, US strength must stem at least partly from policies that allow firms to use new technology most effectively. The key policy challenge is to provide an economic policy environment that permits sufficient flexibility so that firms and entrepreneurs can exploit the full potential range of innovations that new technology makes possible. In addition, maintaining competitive pressure throughout the American economy is necessary to provide firms and entrepreneurs with the incentives to explore the innovation potential of new technologies. A recent study found that two-thirds of the increase in productivity growth since 1995 was due to the innovative use of IT. Only one-third was due to total factor productivity growth in IT producing industries