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The Two Deficits, Part Four:
The Innovation Solution and the Second Productivity Revolution

This is the fourth in a series of posts that comprise Future 500 founder Bill Shireman's insightful essay, The Two Deficits: Why Conservatives and Progressives Are Both Right, from the book

This is the fourth in a series of posts that comprise Future 500 founder Bill Shireman's insightful essay, The Two Deficits: Why Conservatives and Progressives Are Both Right, from the book Towards a New Agenda for America: Ideas To Bridge the Left and Right and Move the Nation Forward (Future 500, 2012). Read parts one, two and three. Shireman will discuss ways to bring the two together during his plenary session at SB '13 on June 4.

In February 2011, the respected McKinsey Global Institute (MGI) issued a stark report, Growth and Renewal in the United States: Retooling America’s Economic Engine. Their machine-age metaphor may have been misplaced, but their conclusion was right on target: If the U.S. cannot significantly boost productivity growth rates by a third, the consequences will be painful and far more damaging to U.S. prosperity than a double-dip into a deeper recession.

“More than ever, the United States needs productivity gains to drive growth and competitiveness,” the McKinsey team wrote. “This acceleration needs to come both from efficiency gains — reducing inputs for given output — and from increasing the volume and value of outputs for any given input.” Labor productivity gains alone are not enough, MGI wrote. It is important that the United States return to the “broadly based productivity growth of the 1990s when strong demand and a shift to products with a higher value per unit helped to create jobs even as productivity was growing.”

If we fail, America might face a resurgence in problems we thought we had overcome in the 20th century: genuine shortages of food to eat, water to drink, and energy to heat our homes and power our machines. The world, after all, is growing more crowded, with people whose affluence is approaching or even exceeding ours.

Decoding effective methods of driving consumer behavior change

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In the next 20 years, today’s 1.8 billion middle-class consumers will nearly triple, to as many as 4.8 billion, McKinsey projected in a second study. That could pit Americans against consumers in other nations, in a competition for food and resources. Last century, real global prices for these dropped by almost half, McKinsey reports, benefiting both rich and poor. But in the first decade of the 21st century, the prices doubled, erasing 100 years of declines. For Americans and the world’s rising middle class, this is difficult. For the three billion on the planet earning under $3 a day, and the one billion surviving on a dollar or less, it can be life or death.

The Opportunity: People and Technology Can Drive an Energy Productivity Revolution

McKinsey offers good news as well. “There is an opportunity to achieve a resource productivity revolution comparable with the progress made on labor productivity during the 20th century,” its team wrote in their November, 2011 study, Resource Revolution. Creative people, and the ideas and technologies they invent, can birth a second revolution in productivity in which we no longer need to trade ecological assets for economic ones. The combination of the microchip, computers, the Internet, advanced materials, advanced recycling, renewable energy, clean technologies and other innovations on the horizon can increase the amount of wealth we create per unit of energy by more than tenfold by the end of this century.

What we need are simple incentives — feedback systems to drive up prosperity and environmental sustainability, and drive down the consumption and cost of fossil fuel dependence. Sometimes, establishing those systems requires mandates. But mandates often have unintended consequences and create bad incentives. Sometimes they can be established by voluntary actions, such as by harnessing the buying power of people and companies in the free market. But reliance on voluntary actions often allows free riders to benefit without paying their share.

However, there is a third option: common sense incentives that hold consumers and businesses accountable for the full costs of resources they use and pollution they impose, and give them reasons to invest in improvements in resource and energy productivity. The key is shifting from an industrial economy that grows mostly by consumption, to a more information-based one that grows by design.

Consider the difference between the two. If I give you a hardcopy version of this book, then you have it, and I don’t. But if I send you a virtual copy over the Internet, then we both have it. Furthermore, we can send it to 100 of our best friends, or 1,000, or more, with almost zero added time or cost. Of course, we can’t feed, clothe or house ourselves with information alone. But by injecting more knowledge into older industrial process, we can drive efficiency, innovation and new value creation. We can create a lot more wealth, with a lot less waste.

The Energy Productivity Explosion

If we are smart, our dominant source of future energy will not be the energy we consume. It will be the energy we create, through innovation. Digital energy isn’t just energy efficiency from better-designed products and processes. It is emergent energy — it comes from innovation. And it is potentially transformative.


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