The resurgence in productivity since the mid-1990s has underpinned the relatively strong performance of the U.S. economy, at least up until recently. Over longer time horizons, productivity growth to a large extent reflects innovation, and the financial industry provides a good example of this innovative process. That discussion will highlight not only the very large potential benefits of innovation, but also the challenges and risks that innovation often raises for established firms, for potential entrepreneurs, and for regulators. Indeed, the industry is marked by continuing evolution. I prefer to think of the term more broadly as applying to the entire economy.
Innovation affects our economy quite directly by affecting productivity.
The resurgence in U.S. productivity growth since the mid-1990s has been widely noted. Since the end of 1995, U.S. labor productivity growth has averaged about 3 percent per year-just like the 1950s and 1960s. Another important part of the resurgence is the rapid pace of innovation. These include innovations in technology, innovations in management processes, and what economists call creative destruction-the process by which firms that innovate replace those that don't. In the long run, the pace of innovation is the most important determinant of an economy's growth prospects and, hence, of the welfare of its citizens.