For more than a half century, the U.S. government has pursued high levels of employment by stimulating the economy through the use of fiscal deficits and monetary expansion that would keep people in their jobs both in a cyclical and secular sense.
The important policy goal was to keep people in their jobs as high levels of aggregate demand kept businesses operating near full capacity or that resulted in workers being re-hired to their jobs after an economic downturn left them temporarily unemployed.
This governmental stimulus ended up producing an inflationary environment that created opportunities for people with the money or knowhow to take advantage of rising asset prices or that resulted in a depreciation in the U.S. currency.
Both these consequences contributed to the decline in labor productivity that has recently gathered much attention. It is this slowdown that is the major cause in the sluggish economic growth that has plagued the U.S. economy in recent years.
If this economic slowdown is to be reversed, we must turn things around so that labor productivity spurs the economy's growth, as it did in the past.
Reversing this trend will not be easy or fast. And this will make it especially hard on politicians whose focus is generally on the next election. That short horizon has led to the popularity of short-sighted policies like deficit spending and credit creation. These easy solutions can easily be sold to voter constituencies but should be rejected.
First of all, they do not work the way they once did. Secondly, short-run fixes remove the focus of business people and investors from productive enterprises, and instead, on financial engineering.
The government must turn its attention to greater fiscal and monetary discipline, and supporting a strong U.S. dollar. This will spur business leaders and investors to focus on labor productivity, which leads to a competitive edge.
The government must achieve and maintain a strong dollar so that businesses cannot rely on currency depreciation to keep them competitive. Deep-rooted competitive advantage stems from producing better goods at lower costs and from innovation -- not from financial engineering.
Two things are important for ensuring this. Basic education is fundamental, but this means education through to the college level.Robert Putman provides a dramatic picture of what has happened to young people in his recent book "Our Kids." The book, which is subtitled "The American Dream in Crisis," compares generations and details the role that class and education play in society.
Among its major points, without opportunities to advance their education, young people will not be able to participate in the rapidly changing business world. This education must be ongoing, not limited to school and college years.
Once upon a time, a person could achieve a basic level of education and skills and be prepared for a lifetime of work. The speed of innovation and the competitive nature of the global economy have required workers to upgrade their knowledge and skills if they want to attain good jobs.
The economist William Baumol exhibited this need for lifetime education when he showed how fast innovation takes place at new companies compared to previous generations. In the 1887-1905 era, Baumol estimated that it took almost 33 years for this so-called creative destruction" to occur.
His last estimate for the 1967-1986 era was 3.4 years as the "interval between the introduction of an innovation and competitive entry."
If innovation and change occur at a faster and faster pace, the workforce has to become more knowledgeable, trained and skilled to keep up and stay employed. This is going to be one of the main tasks of the new era.
In addition, individuals and families must have the confidence in this education and training to be mobile.
One possible tool that would contribute to having the time for continuing education and mobility is called "a universal basic income," or, UBI. One can find reference to this in an article by Edward Luce in the Financial Times. UBI programs have received support from across the political spectrum, from libertarian and socialist thinkers. They get away from the confusing batch of current programs related to workforce education and development.Current research indicates that existing systems along with the loss of confidence people have of getting jobs has reduced both the effort to retrain and the willingness to move, something vitally needed in today's labor market. If this doesn't change, productivity will continue to suffer and things will be more likely to worsen.