Neil Irwin wrote a piece on productivity growth in the New York Times that’s making the rounds. It’s a good piece, definitely worth reading. But I think we need to focus a lot more on the portion of the productivity slowdown that is likely fixable quickly with policy: the depressing effect of chronic aggregate demand slack. While economics textbooks tend to shorthand the determinants of productivity growth as slow-moving, supply-side influences like the education of the workforce and the pace of technological advance, plenty of evidence shows that productivity growth is actually positively affected by the rate of demand-growth in the economy. If this is true, then the deceleration of productivity might be just the latest casualty from the too-long slog back to full recovery after the Great Recession. And this would in turn provide yet another reason why the Fed and other macro policymakers should err strongly on side of giving the economy too much rather than too little support going forward.

This theme—that productivity and potential output may be depressed by our failure to generate enough demand-growth to engineer a full recovery—is also a key point of my recent paper on the Congressional Progressive Caucus budget. If passed, this budget would do a lot for boosting productivity growth. People are absolutely right to be concerned about sluggish productivity growth, but we should at least try to pluck the low-hanging fruit in restoring a decent rate of growth by finally locking in full employment.

I wrote up some of these thoughts a few months ago, and they remain relevant to the debate over productivity and the Fed:

So what has led to plunging productivity growth? It’s hard to know for sure, but we need to seriously consider the possibility that productivity growth (normally thought of by economists as a supply-side phenomenon) is just the last casualty of the chronic demand shortfall that brought on the Great Recession and which was never filled in sufficiently to push the economy back to full health.

How does weak demand eventually filter through and damage growth on the supply side? For one, about half of productivity improvements over time are the result of simple capital-deepening—the fact that business investments give workers more and better tools with which to do their jobs. For example, construction sites thirty years ago had a lot more shovels and far fewer earth-moving machines and cranes than today’s sites have. A key finding in empirical macroeconomics is that the number one determinant of business investment in plants and equipment is simply the underlying pace of economic growth. The falloff in business investment over the Great Recession was simply enormous—real, net investment in equipment and intellectual property by the private sector was negative in 2009, something that has never happened before. Investment has increased since, but it’s fair to say that American workers have less capital to work with today than they would have had absent the Great Recession.

Further, lots of business investment takes the form of research and development. And another key contributor to productivity growth is technological advance. This technological advance does not fall from the sky, rather it is the product of directed investment (R&D) and trial and error (workers learning by doing). When the pace of R&D investment is slow and output growth is slow enough to provide fewer opportunities for learning by doing, it is not shocking that technological advancement may slow. Further, there is ample evidence that firms boost labor-saving investments (which boost productivity) when labor costs are rising rapidly. Rapid labor cost growth has not been a feature of the recovery from the Great Recession. Between 2007 and 2014, real hourly pay for the median worker, for example, has slightly declined (see Table 1 here), and the share of corporate sector income accruing to capital owners rather than to employees reached historic highs. This labor market slack and weak wage growth has provided very little spur to boost productivity in the search for higher profits.

The stakes in how we interpret recent signs on weak productivity growth are huge. If productivity growth is simply a given, and cannot be boosted by further efforts to close the aggregate demand shortfall, this means we’re actually much closer to full employment than otherwise, and, it means that the level of wage growth consistent with a fully healthy economy is closer to 3 percent than 4 percent. And since wage growth is now running around 2.5 percent, we’re getting close to this long-run wage target and hence close to hitting the inflation barrier—that is, crossing the line into economic overheating that will cause prices to rise faster than the Fed’s 2 percent target.

If, instead, further boosts to demand will draw forth increases in the pace of productivity growth, we have a lot of room between today and running into the inflation barrier, and a 3.5-4 percent wage inflation target remains pretty sensible.

The evidence that demand shortfalls eventually bleed into destruction of productive capacity is strong. More importantly, if this evidence is right, then the risk of settling for today’s weak productivity growth and reeling back efforts to spur demand growth are just enormous. To see why, consider the Congressional Budget Office (CBO) forecasts of potential GDP—the income and output the U.S. economy could generate if all resources (including labor) were fully employed. The CBO’s estimate for potential output in 2016 that they released last month is a full $1.7 trillion lower than what they forecast for this year in their 2008 estimates. That is, since the Great Recession, CBO has lowered its estimate of the productive capacity of the U.S. economy by nearly 10 percent. This is a staggeringly large reduction in the economy’s capacity, and the timing suggests that the Great Recession (caused by a huge shortfall in demand) is the prime culprit.

These stakes are far too large to simply shrug and accept slower productivity growth as the “new normal” without at least experimenting to see if the damage that emerged during the demand slack of the Great Recession can be ameliorated with a period of rapid demand growth (or, “running the economy hot”). Federal Reserve hawks want to label the recent productivity slowdown as a sign from above that the economy can’t do much better than it’s doing today. This view ignores far too much economic evidence and threatens to become a self-fulfilling prophecy if they have their way and slow growth through further rate increases. If that happens, we will be a much poorer nation going forward.