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Seizing the $10 trillion opportunity for the US economy: A CEO’s playbook for restoring productivity growth

Jun 27, 2023 | Public | 0 comments

Since World War II, improvements in labor productivity have been the engine of U.S. economic power and prosperity. However, the past 15 years have been lackluster, with productivity growth averaging under 1.4% annually compared to the long-term rate of 2.2% since 1948.

This decline in productivity growth amounts to more than a mere statistical difference. If the United States can restore productivity growth to its long-term trend, it has the potential to add a staggering $10 trillion to its cumulative GDP by 2030. Such a boost in productivity would not only address economic challenges like workforce shortages, debt, and inflation but also support the transition from fossil fuels to renewable energy.

Now more than ever

Productivity growth is always important for long-term growth, but in today’s turbulent conditions it assumes even more importance. Here’s why. Over the past 20 years, the global balance sheet—the sum of all the assets and liabilities in the world that measures wealth—soared. Asset price inflation created about $160 trillion in wealth on paper, but this started to get less and less connected to what was happening in the real economy.

In 2020 and 2021, the intense first two years of the COVID-19 pandemic, global wealth relative to GDP grew faster than in any other two-year period in the past 50 years. As governments acted decisively to shore up economic activity, households globally added $100 trillion to global wealth on paper. The creation of new debt accelerated to $3.40 for each $1.00 in net investment.

Volatility and signs of a potential break in these trends emerged in 2022 and suggested that the balance sheet trajectory of the past two decades may unsustainable. In that year alone, households lost $16 trillion of wealth.

Now, new McKinsey Global Institute research suggests that the chickens may now be coming home to roost. MGI has modeled four plausible scenarios for the period between now and 2030. In the most desirable scenario by far, productivity accelerates so that economic growth catches up with the balance sheet, thereby combining fast growth, rising wealth, and a healthier balance sheet.

The other three scenarios are far from ideal. Two are “pick-your-poison” and the third is a “double dose” of economic pain. Volatility may prove temporary and balance sheet expansion may resume as savings bid up the price of existing assets once again. Or high inflation and interest rates could persist, resembling the US economy after the 1970s oil shock. The worst case would look more like Japan after its real estate and equity bubble burst in the 1990s with drawn-out deleveraging and a sharp contraction in asset prices—in this scenario for instance, US equities and real estate values might drop by more than 30 percent between now and 2030. More productivity growth is also the only way to restore the global balance sheet to health and would avoid risking $31 trillion in wealth destruction the worst-case scenario. Decision makers will need to prepare for the full range of scenarios while hoping for the best outcome.

The productivity imperative for companies

Restoring productivity growth is not only a macroeconomic necessity but a strategic imperative for individual companies. While productivity is measured at the overall economy level, it is individual companies and their employees that drive productivity increases. They do so by increasing their output per employee, by innovating, and by broadly adopting best practices. Here’s a productivity playbook for CEOs, who hold the key to unlocking significant gains in productivity.

1. Build a workforce for the future

Frontier companies, those at the forefront of productivity, have a greater ability to acquire the skilled talent required to use technology effectively. They accomplish this by either attracting top talent or by investing in developing their existing employees’ skills. Leaders can shift focus from credentials to experience when hiring, valuing skills and capabilities over formal qualifications. MGI research has shown that investing in on-the-job training and rotation programs to build a versatile talent pool can pay off for both workers and employers. Expanding family-friendly policies, including childcare, elder care, and parental leave, can also help attract and retain top talent.

2. Ignite business reinvention

Many firms are not making the most out of their technology investment. While they may be adopting technology in pockets to drive productivity increases, the benefits are not captured at scale and result in only small improvements in productivity. Leaders need to embrace digital transformation with audacity by setting ambitious goals and fostering shared accountability. It’s not enough to augment existing ways of working; CEOs need to work with their leadership teams to redesign work and automate and digitize parts of their operations to capture the full benefits of technology. With generative AI evolving at record speed, CEOs should consider exploration a must not, not a maybe. Generative AI can create value in a wide range of use cases. Our latest research estimates that generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases we analyzed. The economics and technical requirements to start are not prohibitive, while the downside of inaction could be quickly falling behind competitors. Each CEO should work with the executive team to reflect on where and how to play. Leaders can complement technology investments with R&D and other intangibles to reimagine core business operations. MGI research has found that the most competitive firms invest 2.6x more in intangibles compared to other firms.

3. Balance energy affordability and productivity

As firms now embark on the transition to net-zero emissions, the rising cost of energy could turn into a headwind for productivity. Business leaders need to manage trade-offs between the speed of transition and affordability. CEOs need to revisit capital-allocation processes to facilitate rapid adaptation to emerging green technologies. They can also develop long-term plans for the net-zero transition, allowing sufficient time for business units and employees to adjust and align.

4. Shape the economic context

High-performing firms create strong connections to global value chains, enabling them to access markets, ideas, and talent. They actively collaborate with suppliers and customers, forming dynamic ecosystems that can generate local agglomeration benefits and co-innovation potential. Collaboration with the public sector can also pay off when it comes to addressing challenges related to skilled talent and physical infrastructure.

The article originally appeared in Forbes.

The post "Seizing the $10 trillion opportunity for the US economy: A CEO’s playbook for restoring productivity growth" appeared first on McKinsey Insights

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