Productivity and the Economy:

The Engine of Success

By Bryan Kaus

Productivity = Prosperity: At the macro level, productivity is nothing less than the engine of a nation’s economic success. As a recent Foreign Affairs analysis bluntly stated, “productivity is the central determinant of a nation’s average standard of living and its overall economic success”. It is the reason each generation can enjoy a higher quality of life than the one before – if productivity grows. When workers produce more output per hour, incomes rise, profits increase, and living standards improve. Indeed, Nobel laureate Paul Krugman famously noted that “Productivity isn’t everything, but in the long run it is almost everything.” Now, you don't have to agree with everything he says to find validity on that - that is a fundamental truth. Countries with higher productivity can afford better education, healthcare, and infrastructure for their citizens. Conversely, productivity slowdowns are behind stagnating wages and frustration. Americans feel this acutely today: despite low unemployment and recent innovations, many are uneasy about the economy’s future. Why? Because productivity growth has been lackluster for much of the past 15 years, limiting improvements in living standards.

A Half-Century Roller Coaster: Post–World War II, U.S. productivity boomed at ~2.8% annually, powering decades of prosperity. But from the mid-1970s on, it has been a story of slowdown and the occasional revival. From 1973–1995, productivity grew only ~1.4% per year. A brief renaissance from 1995–2005 saw 3% growth as computers and the internet boosted efficiency. Since 2005, however, U.S. labor productivity has limped along at ~1.5% annually. The pandemic produced wild swings – a spike one year, a drop the next – but it’s too early to tell if a lasting uptick will stick. These small percentage differences have huge impacts when compounded. One estimate found that if post-1973 U.S. productivity growth had kept up with the prior trend, median household income would be ~58% higher (about $30,000 more per year by 2013). That is a staggering lost opportunity affecting millions of families. Other advanced economies saw similar slowdowns – the UK managed a meager 0.4% annual productivity growth since 2008 – but the U.S. can’t rest on being “less bad” than others. And rising competitors like China have harnessed productivity gains to vault forward.

Why Productivity Matters for Policy and Business: Productivity growth isn’t simply an academic metric, it has real fiscal and geopolitical consequences. When workers produce more, wages and corporate profits rise, expanding the tax base. Government coffers then fund things like defense and social programs without needing onerous new taxes. Robust productivity thus strengthens both “hard power” (through greater economic might and defense funding) and “soft power” by showing the success of a nation’s economic model. For businesses, a more productive economy often means more innovation, efficient supply chains, and opportunities to scale. But if national productivity stagnates, policymakers face tough choices: how to pay for an aging population’s retirement, how to grow incomes, how to compete globally. The recent Fed commentary echoes this. Fed officials have noted that the U.S. entered 2025 on surprisingly firm footing partly due to “robust gains in the labor force and productivity”, which helped tame inflation even as growth continued. In contrast, if productivity remains subpar, boosting output without stoking inflation becomes very difficult. Investors too watch productivity trends closely: when it rises, it can “raise the level of potential output”, allowing the economy to grow faster without overheating.

Policies for a Productivity Renaissance: What can rekindle productivity growth? Economists broadly agree on some ingredients. Slaughter and Wessel note that policies to spur innovation are key, including investment in R&D, education, and openness to ideas and talent from around the world. Innovation is the lifeblood of productivity: one study attributed about 80% of U.S. per-capita GDP growth from 1948–2013 to innovative ideas (technological change). This includes everything from the assembly line to the semiconductor to the internet. Government has a role because the social returns on R&D are higher than what private firms can capture, meaning without public support there will be under-investment in research. Historically, when America poured resources into big innovations – the space race, DARPA projects, public universities – the payoff was immense. For example, the U.S. pioneered mass high school education in the early 20th century; high school enrollment jumped from under 20% of teens to over 70% within a few decades. That investment in human capital paid off in soaring productivity in the 1920s–30s and narrowed income inequality. Similarly, after World War II, the GI Bill educated millions of veterans (doubling college graduates in late 1940s), and federal R&D funding peaked at 2.2% of GDP during the Space Race. The result was a golden age of innovation – from jet engines to antibiotics to Silicon Valley – and rapid productivity gains.

Today’s leaders should draw lessons from those eras. Cutting off the flow of ideas, people, or capital is the wrong approach. Propping up unproductive sectors or erecting trade barriers might score political points, but as Slaughter and Wessel warn, policies that “build barriers to the flow of ideas, capital, and people… are doomed to fail” at raising productivity. Instead, welcoming skilled immigrants, encouraging knowledge exchange, and investing in research yield far better results. Likewise, businesses and investors should back innovation in their strategy – whether that’s adopting new technologies like AI or upskilling their workforce – to enhance their own productivity.

Micro Implications – Productivity on the Ground: National productivity ultimately stems from cumulative firm-level improvements. Every executive should understand how their company contributes to (and benefits from) this engine. For instance, consider the impact of productivity on corporate earnings: companies that automate routine tasks or streamline workflows can produce more output with the same or fewer inputs, boosting margins. In recent earnings seasons, many firms highlighted efficiency gains – whether through digital transformation, AI-assisted processes, or lean operations – as drivers of profit even in slow revenue environments. In essence, firms that figure out how to do more with less will outcompete those that do less with more. Moreover, in a tight labor market, improving productivity is often the only way to grow. With U.S. unemployment under 4%, simply hiring more people is not always feasible; instead, empowering each employee to generate higher output is critical. This might involve new tools, better training, or reorganizing teams for agility. As we’ll explore in the next essay, enlightened leadership plays a big role in creating the conditions for employees to be more productive in a healthy, sustainable way.

Ultimately, productivity is everything when it comes to economic prosperity - and thus opportunity. It has been the defining advantage of nations and companies alike. Leaders in both public policy and business must keep their eyes on this prize: whether it’s through smart investments in innovation or cultural changes on the factory floor, boosting productivity is the surest path to long-term success. Conversely, ignoring it – or pursuing short-term gains at its expense – is a path to stagnation. As we turn to the organizational level, we’ll see how the pursuit of productivity must be balanced with humanity, lest we veer into counterproductive “toxic productivity” or burnout.