We Need Growth. Here's How to Get There

October 13, 2011

Saying that growth is the answer to economic decline is like saying that one must win to avoid losing.  It's a dead-end truth.  Where exactly are the opportunities for growth to be found?  McKinsey's latest report, entitled "What Business Can Do to Restart Growth," acknowledges the obvious and goes one critical step further by mapping out how to get there.


McKinsey starts with the assumption that growth doesn't come from the top-down -- and never has.  If the economy were a plant, it would grow up from fertile, complex soil.  The government's role is to order the ecosystem and ensure the conditions for growth.


If this is so, the first opportunity for growth is in infrastructure.  The public sector is planning for a little over $1 trillion in upgrades to our current infrastructure over the next five years.  Unfortunately, we need to spend some $2.2 trillion for it be in serviceable condition.  That's where private sector capital can enter to make up the difference, and where government should pull regulatory barriers down.  The McKinsey Global Institute estimates an upside of 2 million new jobs, not to mention the framework for a stronger economy.


The second opportunity is in what McKinsey terms the "internet ecosystem", a fertile hub for growth and well-paid (though not always plentiful) jobs.  Policymakers are well-equipped here to act as prudent gatekeepers.  That is, they must ensure the internet stays competitive, allow for the best and the brightest to stay in America, and resist the urge to silo or redirect capital.


Opportunity may also be found in utilizing our resources more productively in order to keep up with demand and to lower volatility.  It's about making more with even greater supply.  Here too there's a clear opportunity for private sector investment.  "Almost 70 percent of the productivity opportunities for some resources have annualized potential returns above 10 percent."  The greater risks are that policymakers will either do too little (having no eye to the future) or too much (centralizing and setting industrial policy).


The fourth opportunity is seen in bridging the "skills gap."  The demand for skilled workers has never been greater, especially in the areas of science, technology, engineering, and mathematics (STEM).  The mismatch is in education and immigration.  We have the capacity to educate workers to meet this demand, but don't, and those we do train are primarily immigrants that we send away.  Institutions of higher education must collaborate with companies to ensure their graduates are employable, and companies must point to the need for hiring skilled workers no matter which country they come from.


Fifth and finally, we need a more productive public sector, especially at the city level:



"If the G8 nations could increase the public sector’s productivity by 1.5 percent annually (in line with what private industry has achieved over the past three decades), they could generate benefits worth $1 trillion a year—equivalent to 1.5 to 2.5 percent of these nations’ combined GDP."


McKinsey has done the hard part of showing where the opportunities for growth are and how to find them.  Passively avoiding decline is not the path to prosperity, that much is true.