Worker productivity has risen dramatically due to widespread use of IT tools. In the United States, total productivity growth averaged a modest 1.5% to 2.0% from 1960 to 1990. From 1990 to 2010 growth doubled to an average 4.0%. IT investments are estimated to have contributed most of that gain. Manufacturing productivity data are shown in the chart below.

In the long run, potential real GDP growth is the sum of employment growth plus productivity growth. If employment gains average 1% then overall GDP growth could reach 5.0% before inflation threatens. That actual growth rate achieved is impacted by aggregate demand which in 2012 is growing at a paltry 2.0% pace. Consequently, the “growth gap” is a whopping 3.0% (5% potential less 2% demand).

Employment growth depends on the strength of aggregate demand and vice-versa. When there is slack in the economy as there now is, workers can produce more given their higher productivity. That in turn slows jobs growth which tempers aggregate demand. The quickest way out of this conundrum is government policy to promote jobs growth. That may be tax cuts, incentives for hiring and/or more government spending geared to job gains such as infrastructure investment.

That said, the inability of the U.S. Congress to function effectively on the economic policy front is the biggest obstacle to economic expansion.