When people and machines get better at their jobs, when an hour of work yields more output, everyone can be paid more without prices rising. That is productivity growth, and it drives decades of improvement in American living standards. A recent Strategas Research analyst stated: “Productivity is key for disinflationary growth and for raising aggregate living standards. Instead of paying labor or capital, both labor and capital get paid together (i.e., the economic pie gets bigger).” That idea is not wishful thinking but is how sustainable prosperity actually works, and why restoring strong productivity growth may be the most important economic challenge facing the United States today.
What is Productivity?
At its simplest, productivity is how much output is produced per hour worked. When it rises, businesses can pay workers more and earn healthy profits at the same time, without needing to raise prices, because there is simply more to go around. This is what “disinflationary growth” means in practice: the economic pie expands, so no one must fight over the same-sized slice. In a low-productivity environment, wage gains for workers tend to come at the expense of business margins, and vice versa. Productivity growth mitigates that tension. It is the rare economic force that benefits both labor and capital, while keeping inflation in check.
Recent Trends: Progress After a Long Dry Spell
For much of the period following the 2008 financial crisis, U.S. productivity growth was disappointingly slow, averaging 1.5 percent a year and well below the postwar norm. The good news is that the trend has recently improved. The Bureau of Labor Statistics initially reported that U.S. nonfarm business productivity rose 2.3 percent in 2024; subsequent data revisions put that figure at 2.8 percent — among the strongest annual gains in two decades outside of recession-recovery years. In both cases, output grew far faster than hours worked. Real wages rose 2.0 percent in 2024, exactly the kind of shared gain the “economic pie” framework predicts. Federal Reserve economists found that this rebound was driven by genuine efficiency improvements, not just increased spending on equipment. That matters: real efficiency gains tend to be durable, whereas spending-driven boosts can fade quickly. The structural challenge, however, remains. Productivity in 2025 ebbed to a 2.2% average, stronger than in recent years but a step down from 2024. An aging workforce and slower population growth mean the U.S. can no longer count on simply adding more workers to expand the economy. Higher output per hour is increasingly the only path to broad-based growth.
Artificial Intelligence: The Next Big Lift
No development holds more promise for productivity than artificial intelligence (AI). Goldman Sachs estimates that generative AI could raise U.S. labor productivity by roughly 15 percent once widely adopted, unlocking approximately $4.5 trillion in annual economic value. The Penn Wharton Budget Model projects that AI will lift GDP by 1.5 percent by 2035 and nearly 3 percent by 2055. Business survey data from the Census Bureau show that about 18 percent of firms have adopted AI as of year-end 2025, with utilization accelerating at a pace comparable to the early spread of the personal computer.
The broad economic payoff has not fully materialized yet. As of early 2026, Goldman’s economists noted they still do not see a measurable economy-wide productivity boost from AI. But companies that have deployed it effectively report task-level productivity gains of around 30 percent, a compelling preview of what is coming. History suggests patience is warranted: the electric motor and the personal computer each triggered major productivity booms roughly 20 years after their introduction, once adoption crossed a tipping point. AI reached mass-market scale around 2022. Beyond routine task automation, AI is already beginning to accelerate scientific discovery itself, from Nobel Prize-winning advances in protein modeling to AI tools that help researchers generate new medical hypotheses and drug targets faster than ever before. That kind of compounding effect could extend productivity gains well beyond current projections.
Better Lives, Healthier Finances
The case for productivity extends far beyond individual paychecks. The United States is running deficits that are unsustainable. The federal deficit reached $1.8 trillion in fiscal year 2025, more than 50 percent above the 50-year average as a share of the economy. Federal debt now equals roughly 100 percent of GDP and is projected to reach 156 percent by 2055 under current law, according to the Congressional Budget Office. Interest on that debt exceeded $1 trillion in 2025 for the first time ever. Growing debt crowds out investment, keeps interest rates elevated, and ultimately constrains what the government can do to support its citizens.
Faster productivity growth addresses the fiscal problem in ways that spending cuts and tax increases alone cannot. A more productive economy generates more taxable income naturally, without rate increases. It keeps inflation lower, which means lower interest rates and cheaper debt service. It also enlarges the overall economy, reducing the debt burden as a share of GDP. The CBO’s own analysis predicts that just half a percentage point of additional annual productivity growth would reduce projected federal debt in 2055 from 156 percent of GDP to 113 percent, a difference far larger than the most ambitious fiscal reform proposals could achieve.
For ordinary Americans, the benefits are equally tangible. Research from the Federal Reserve Bank of Dallas shows that productivity growth has been the single most important driver of rising living standards over the past 150 years, through wars, depressions, and every wave of technological change. When productivity slows, real wages stagnate. When it accelerates, workers earn more, goods cost less, and public services are better funded. AI that takes over repetitive, time-consuming work does not simply enrich shareholders, it frees workers to focus on more rewarding tasks and opens the door to entirely new jobs and industries. About 60 percent of Americans today work in jobs that did not exist in 1940, a powerful reminder that new technology has historically created far more jobs than it has eliminated.
Conclusion
Productivity growth is not merely economic theory. It enables society to pay its workers well, rewards its investors, funds its government, and reduces its debts, all at once. The United States has the ingredients for a productivity renaissance: a recent upturn driven by real efficiency gains, and the most transformative technology in a generation poised to drive it. Realizing that potential will require investment in workforce skills, thoughtful policy, and the willingness of businesses to redesign how they work rather than just layer AI tools on top of old processes.
There is no painless shortcut to fiscal sustainability or broadly shared prosperity. But there is a path that makes both achievable simultaneously. It runs through productivity, the one economic force powerful enough to grow the pie for everyone.
Sources
U.S. Bureau of Labor Statistics, “Productivity and Costs — Fourth Quarter and Annual Averages 2025, Preliminary,” March 5, 2026. bls.gov/news.release/pdf/prod2.pdf
U.S. Bureau of Labor Statistics, “Total Factor Productivity, 2024,” March 21, 2025. bls.gov/news.release/prod3.nr0.htm
U.S. Bureau of Labor Statistics, “Productivity up 2.3 percent in 2024,” The Economics Daily, February 12, 2025. bls.gov/opub/ted/2025/productivity-up-2-3-percent-in-2024.htm
Congressional Budget Office, “The Budget and Economic Outlook: 2025 to 2035,” January 2025. cbo.gov/publication/60870
Congressional Budget Office, “The Long-Term Budget Outlook: 2025 to 2055,” March 2025. cbo.gov/publication/61270
Congressional Budget Office, “The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget,” May 2025. cbo.gov/publication/61332
Congressional Budget Office, “Monthly Budget Review: Summary for Fiscal Year 2025,” November 2025. cbo.gov/publication/61307
Goldman Sachs Global Investment Research, “The Potentially Large Effects of Artificial Intelligence on Economic Growth” (Briggs/Kodnani), March 2023.
Goldman Sachs Research, “How Will AI Affect the Global Workforce?” August 2025. goldmansachs.com/insights/articles/how-will-ai-affect-the-global-workforce
Federal Reserve Bank of Chicago, “Quarterly Industry-Level Labor Productivity Data for the U.S.,” Economic Perspectives, No. 1, 2025. chicagofed.org/publications/economic-perspectives/2025/1
Federal Reserve Bank of Dallas, “Advances in AI Will Boost Productivity, Living Standards Over Time” (Mark A. Wynne), Dallas Fed Economics, June 24, 2025. dallasfed.org/research/economics/2025/0624
Penn Wharton Budget Model, “The Projected Impact of Generative AI on Future Productivity Growth,” September 8, 2025. budgetmodel.wharton.upenn.edu/issues/2025/9/8/projected-impact-of-generative-ai-on-future-productivity-growth
U.S. Bureau of Labor Statistics, “Productivity and Costs — First Quarter 2025, Revised,” May 8, 2025 (source for revised 2024 annual average of 2.8 percent). bls.gov/news.release/archives/prod2_05082025.htm
US Federal Reserve, Fed Notes, “Monitoring AI Adoption in the US economy”, April 3, 2026. https://www.federalreserve.gov/econres/notes/feds-notes/monitoring-ai-adoption-in-the-u-s-economy-20260403.html
Strategas Investment Research, “Productivity is a Skeleton Key”, March 25, 2026.
The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Markets remain subject to volatility, geopolitical risks, and unforeseen economic developments. The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results. Charts used are for illustrative purposes only and are based on historical data and estimates that may not be indicative of future results.
Susan Berry-Gorelli also is the Director of Research and a Portfolio Manager of Baldwin Investment Management. She has over 30 years of individual and institutional investment and risk management experience in the financial services industry. Susan attended The College of William and Mary and the University of Delaware, earning a B.A. in Economics and History, Summa Cum Laude and Phi Beta Kappa. She is the Board Vice President of the Colonial Theatre in Phoenixville, and also serves on the finance committees of the French and Pickering Conservation Trust and the Whitemarsh Boat Club.