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Losing the Productive Edge

With the U.S. economy still humming in the eighth year of this century’s longest expansion, the nation’s political and business leaders are in a self-congratulatory mood. There is indeed much to celebrate: strong job growth; unemployment and inflation at their lowest levels in decades; a soaring stock market; consumer confidence at record levels; American firms dominating world high-technology markets. Small wonder then that the issue of “economic insecurity,” once expected to dominate the politics of the 1990s, has faded into the background.

But the ultimate test of any nation’s economic performance is the prosperity of its citizens, and here the news isn’t quite so good. True, many Americans (especially the more affluent ones) have seen their incomes go up recently. But nearly half of all American families still have incomes below $35,000 per year-less than what most people regard as being necessary to live in reasonable comfort. Moreover, the economic circumstances of the majority of families haven’t improved much in two decades. Indeed, by one estimate the incomes of the least affluent 60 percent of families are lower now than they were in 1979, after adjusting for inflation.

In the long run, no country can enjoy sustained growth in its standard of living unless it also achieves a healthy rate of productivity growth, and the single most important factor behind the disappointing statistics on U.S. living standards is the weak productivity growth of the American economy.

During the 100 years leading up to the early 1970s, America’s productivity, expressed in terms of output produced per hour of labor, grew at an average rate of about 2.3 percent per year. The result was a twelvefold increase in productivity over this period, and a dramatic increase in American living standards. Sometime in the early 1970s, however, the rate of productivity growth declined sharply, and for more than two decades the U.S. economy has been stuck in low gear. Labor productivity during this period grew at a rate of about 1.1 percent per year. A decline from 2.3 percent to 1.1 percent might not seem very significant, but over a long period it matters a great deal. If productivity growth in the past 25 years had matched the previous century’s average growth rate, American household incomes would be about 35 percent higher than they are today, and millions more American families would be enjoying a middle-class standard of living.

What must we do to regain the productive edge? There is no one simple answer to this question. But a key part of any solution is more investment. Today the combined forces of globalization, technological innovation, and the deregulation of many industries at home and entire economies abroad are creating enormous opportunities for American firms to invest in the development of new products, services, and markets. Yet the very forces creating such great potential for growth are simultaneously giving rise to unusually turbulent business conditions. What actions and strategies are most likely to produce a higher rate of productive investment in this environment?

Today some of America’s greatest economic assets are its nurseries of innovation-its deep, sophisticated venture-capital markets; its system of industrially connected, high-quality research universities; and an entrepreneurial culture that encourages risk-takers and rewards them handsomely when they succeed.

But after studying the origins of America’s industrial revival over the past decade, I have concluded that a group of successful mature companies-Levi Strauss among them-also have important lessons to teach us about growth under conditions of uncertainty. These firms are all quite different, but they all share one fundamental quality: a powerful, lasting awareness of identity and of values extending beyond the bottom line. Over the years these companies have exhibited a sense of purpose beyond profit that, paradoxically, has helped them to increase their profitability, and to navigate through periods of great uncertainty along the way. There are important lessons here for other companies. And, as we shall see, for our society as a whole.

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