That’s the trend Vanguard researchers found when studying global patterns of research and development for a recent Megatrends research paper, How America Innovates (15-page PDF, issued June 2022). “It can take years, often decades, for new discoveries to find their ultimate purpose,” said Adam J. Schickling, a Vanguard economist who coauthored the paper. “A groundbreaking technology can exist but not manifest in economic statistics until an industry or firm finds a commercial application.”

Consider this: in 1952, a botched experiment at glassmaker Corning led to the creation of an ultrathin, ultrastrong, ultraclear panel that no one seemed to need.¹ Half a century later, that unheralded component transformed the consumer electronics industry. It made possible the touchscreen technology now ubiquitous in smartphones, notebooks, tablets, and TVs.

When it comes to innovation, what appears to be stagnation of new ideas sometimes proves instead to be that long stretch between the discovery of an extraordinary idea and its commercial use. As prior Vanguard research has found, there were similarly long lags between the invention and widespread adoption of the telephone, the lightbulb, and even the personal computer.²

The new report, written by Schickling and his colleagues Joe Davis and David Diwik, reconciles the lackluster official productivity growth of the past decade with the notion that invaluable discoveries were indeed in development. They just hadn’t all yet expanded into commercial applications. 

“We’ve seen incredible advancements in the food science, biomedical engineering, and material science spaces,” Schickling said. “The creation of biodegradable food packaging may reduce world wide material pollutants. Medical-detection wearables may soon be able to detect health issues well before the onset of visible symptoms. Solar technology is expanding into everyday materials like paint and textiles, which can dramatically enhance our ability to capture reusable energy.”

These nascent technologies have yet to grab a substantial commercial foothold, but they and other still-undeveloped technologies may be on the precipice of reshaping our economic landscape.

New technologies free people from less productive tasks (browsing grocery aisles, driving to the mall), empowering us, if we so choose, to focus on grander endeavors (the genetic mapping of viruses, the enhancement of crop yields). Still, research, development, and the production of new ideas are costly. Corporations are reluctant to invest in technologies during times when labor is cheap. That’s when it might be less expensive to boost output by hiring more workers as it was right after the 2008 global financial crisis.

“Ultimately, you need innovation to enable workers to produce more with less,” Schickling said. “Expecting more from workers without technological innovation is not usually a sustainable productivity model.”

Enter the current historically tight labor market in the U.S. and abroad. The U.S. leisure and hospitality industry alone is short 1.5 million workers. There is immense global competition for workers across many industries, which increases the cost of labor. “Companies that want to continue to operate at full capacity under these conditions may be well served by an investment in productivity-boosting technologies,” Schickling said.  

The combination of burgeoning research and very tight labor conditions leads Schickling and his colleagues to expect an average U.S. GDP per capita growth rate of 2.0%–2.5% from 2020 to 2030. That would be a pace unseen for decades.³ It also would be a positive development for wage growth, asset returns, and broader economic opportunity.

What’s more, productivity growth can temper rising inflation and the economic sensitivity to higher interest rates. As new technologies reduce manufacturing costs and time to market, companies are able to produce more outputs with fewer inputs. “Those inputs could be financial capital, labor, or commodities,” Schickling said. “In any case, productivity growth is the natural antithesis to inflation.”

As shown below, the GDP response to rising interest rates varies depending on the productivity environment. Economic growth is less sensitive to rising rates during a period of higher productivity growth.

Still, there are economic, demographic, and geopolitical risks that could affect long-term productivity patterns. Economic uncertainty, an aging workforce, and global political tensions can all impact the proliferation and commercial use of new ideas. At the same time, an increasingly globalized economy has accelerated international knowledge sharing, diversified the composition of research teams, and, our researchers believe, increased the pace for innovations to find commercial applications.

• Estimating neutral rates: Why the era of ultra-low rates may be coming to an end (21-page PDF, issued June 23, 2022)
• The economics of climate change (20-page PDF, issued April 18, 2022)
• A Tale of Two Paths: The Future of China (27-page PDF, issued September 28, 2021)
• The deglobalization myth(s) (12-page PDF, issued September 23, 2021)