The Great Decoupling

In the great debate over slow economic growth and falling incomes of the middle class, the usual culprits are globalization, growth of technology and income inequality.
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Just published in the latest issue of the Harvard Business Review, “The Great Decoupling: an interview with Erik Brynjolfsson and Andrew McAfee” is a more focused analysis of what is happening. These two technology experts note that both labor productivity and GDP are growing much faster than the growth in the number of jobs as well as median family income.  This is what they refer to as the great decoupling.  They are careful to point out that the same trends are happening in other developed countries such as Finland, Germany and Sweden.
They emphasize that the best response to this decoupling is to create an economic environment that’s conducive to innovation, new business formation, and economic growth.  In their opinion this means to focus on five things:

  • Education. Primary and secondary education systems should spend more time on things that computers are not good at such as creativity, interpersonal skills and problem solving.
  • Infrastructure. World-class roads, airports and networks are the foundations of growth.
  • More entrepreneurship. Most industries and regions are seeing fewer new companies than in recent decades.
  • Immigration reform. The U.S. needs to attract more of the world’s most talented people. Immigrant-founded companies have been great job-creation engines.
  • Basic Research. Since companies concentrate on applied research, the government needs to step up support for basic research. Both total and nondefense federal R&D spending, as percentages of GDP, have declined by more than a third since 1980.

The recommendations of Messrs. Brynjolfsson and McAfee are quite sensible.  But they will be hard to implement overall.  More federal funding for both infrastructure and basic research will be very difficult in an era of tight budgets.
This is the challenge of our time.  We must become better prepared to prosper in an era of increasing global competition and rapidly expanding technology.  And do this in a tight fiscal environment.
A very big challenge indeed!

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