Ricardian Trade Theory and U.S. Total Factor Productivity

Total Factor Productivity which is defined as the economy-wide effects of innovation indirectly as the residual part of productivity growth that cannot be explained by other factors. Basically, the extra bit of efficiency that accumulates in an economy when  everybody is becoming more efficient. According to a February 2018 Federal Reserve Bank of San Francisco Economic Letter titled, "The Disappointing Recovery in U.S. Output after 2009", quarterly growth in Total Factor Productivity is beginning to slowdown. The Economic Letter also highlights that the slowdown began before the Great Recession and coincided with a peak in labor force participation.

What the analysis featured in the Economic Letter ignores is the fact that the U.S. economy has not been growing its Total Factor Productivity in a vacuum. When the U.S. economy began reaping the benefits of the shift from a manufacturing base to a services base by the early 1990s, Total Factor Productivity increases manifested. Being a high capital economy, able to take advantage of economies-of-scale, the U.S. economy had a comparative advantage over its trading partners in services. The advantage compounded through the 1990s and culminated with the bursting of the dot-com bubble. During the formation and inflation of the dot-com bubble the U.S. dollar appreciated as foreign investment capital flooded in and the U.S. grew the capital account surplus.

By the turn of the millennium, labor force participation was peaking as the baby boomers began their exit from the labor market. Within five years the slowdown in Total Factor Production became apparent, just in time for the Great Recession. But after pressing its advantage in services from about 1985 to about 2005, the U.S. economy began experiencing diminishing returns. Data moves more freely around the world now more than ever before and has been doing this for decades. Simply put, other countries have the internet now. Open trade has allowed other countries to buy, learn from, and develop upon U.S. services and technologies. They too can grow their Total Factor Productivities. The good news is if we keep trading with countries that are getting more and more efficient, it will keep import prices low which benefits consumers.