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So When Will the Next Productivity Boom Happen?
If the US economy is going to generate sustained 3% annual growth, or anything close to that, it will require much faster productivity growth. The bull case looks something like this one, via my AEI colleague Bret Swanson and economist Michael Mandel:
The 10-year productivity drought is almost over. The next waves of the information revolution—where we connect the physical world and infuse it with intelligence—are beginning to emerge. Increased use of mobile technologies, cloud services, artificial intelligence, big data, inexpensive and ubiquitous sensors, computer vision, virtual reality, robotics, 3D additive manufacturing, and a new generation of 5G wireless are on the verge of transforming the traditional physical industries—healthcare, transportation, energy, education, manufacturing, agriculture, retail, and urban travel services.
So be patient and understand that there can be a lag between when technological innovation occurs and when that innovation shows up in the productivity and growth data. A recent Barclays report, “Robots at the gate: Humans and technology at work,” uses the above chart to make the point that it can take a while for great technological leaps to become capably used and then diffuse throughout the broader economy. From the report:
The great technological leaps of the past 200 years were arguably the steam engine and its applications, followed by the automobile and electrification of the economy. Most of this happened in the years just before and right after the turn of the 20th century. Yet, as [the above chart] shows, productivity languished in the 20 years between 1900 to 1920, even as all of these game-changing inventions were making it into the mainstream. By contrast, productivity growth averaged 1.5% or more in every decade from 1940 to 1980, including a dizzying 3.3% between 1950 to 1960, a period not associated with economy-changing technological advances.
And what explains these lags? Again, Barclays:
Published in EconomicsBut why are there such long lags between the introduction of a new technology and the effects showing up in productivity and growth data? The reason: an economy typically needs several years to decades to fully integrate a game-changing technology. Companies need to build up a critical mass of capital stock in the new technology, workforces need to be retrained, consumer behavior needs to adapt, business models need to be adjusted etc. All of this takes time. Only after that do the productivity gains flow.
Consider past such examples: in 1882, the Edison Electric Illuminating Company of New York started lighting up parts of Manhattan. This was a truly revolutionary technology with arguably immediate effects on productivity, since it lengthened the working day and allowed people to use their time productively even when it was dark. But it wasn’t until 1925 that half the homes in the US finally had electricity.
Automobile adoption has a similar history. Karl Benz, whose name would eventually headline one of the world’s largest car companies, had an internal combustion engine car in Germany in 1885, as did Gottlieb Daimler. Shorty thereafter, Henry Ford started selling his own cars in the US. But by the turn of the century, only a few thousand cars had been sold in the US.
The rise of the internet by the early 1990s was supposed to up-end all retailing. Pets.com was set to revolutionise sales of pet supplies. Etoys.com was supposed to do the same for toy sales. WebVan was going to do the same thing for groceries. All three went bust within a few years. By 2000, ecommerce sales were barely 0.5% of all retail sales by Census Bureau estimates. Seventeen years later though, the hype is starting to feel justified, with the Census Bureau estimating that online sales made up 10% of all retail sales in Q3 2017, and grew at over 15% annualised while all retail sales grew in the low single digits. Second- and third-tier retail malls all across the US are in trouble as anchor tenants get squeezed by online sales. When Amazon bought Whole Foods, for example, the stocks of several leading grocery chains dropped sharply. The retailers that are now online leaders needed time to understand the opportunity of the internet. They needed time to change consumer behaviour and to refine the logistics of efficient order fulfillment, delivery and the like.
Interesting to see the bump up to the 3% rate as being of the year 1950. Truman had initiated the largest single peace time US budget – ever. The money was used for such things as the GI Bill, the building of community colleges and community hospitals and of course, weapons needed for such things as the nukes we now needed for modern warfare, as well as military needs for our adventures in Korea et al.
I am curious to learn what your economic analyst thought of Trump wanting money to handle a re-build of our infra structure… There seems to be historical precedent for such a thing, simply by examining the Truman budget and how the money went to the various communities inside the US. It should also be pointed out that Eisenhower continued along the same type of projects when he became President. Liberals often have criticized Ike for not expanding the budget, but there really was no need to do so. Truman’s budgetary increases had been such that Ike got a national highway system built using a budget that held a slight decline in spending.
With all the money going to individuals across the nation, the economy flourished. People moved from their simple apartments out to homes in the suburbs. Families went from one car to two, and almost every home had a TV.
There is talk that with the tax cut monies there will be a bump in prosperity. I know that is not the same thing as productivity, but it is an important part of the puzzle. For instance, as far as prosperity vs productivity: Software developments made it easy to do graphics on computers by the end of the 1980’s. There was a jump in productivity for people in that field. But studies showed they weren’t necessarily happier – they were expected to do much more work than prior to the software revolution just to stay afloat. I think that Ai will have a similar effect on the average working person. Except for the segment of society that finds they are now without jobs. (Those folks will feel worse.)
I find it hard to believe there was only a 1% productivity growth factor in the 1990s. That is when the personal computer and Internet dramatically improved white-collar productivity. It was the first major increase in white collar productivity since the 1910s, when the typewriter became standardized. Value-added information services are an important part of today’s economy. It is hard to really do good inventory control without widespread access to computers and widespread computer literacy, and that occurred in the 1990s.
JimP,
Let us say there is this regional culture that has decided that valleys are evil places and that the sides of hills are good places. Let’s not ask why they believed this, let’s just accept as a premise that they believed this. Planting crops on the rocky dry side of a hill turns out to be very “unproductive”. Planting crops in the fertile watered valley would be much much more productive. However, the culture associates the side of the hill with goodness and the valley with evil. So all of their agriculture winds up on the side of a hill and the valley remains unused.
One day a ‘prophet’ comes along and convinces everyone that the side of a hill isn’t good and a valley isn’t evil. They are just both natural features that have no moral component whatsoever. Then one of the farmers says, “if what the great ‘prophet’ says is true then I am going to start farming in the valley because I think that it would probably be more productive”. He does and sure enough, it is more productive. The productivity of the region is measured at the end of the year and there has been a huge increase. Where did it come from? There were no changes. Same region, same farmers, same farming techniques. What caused the increase in productivity? How did the miracle occur?
The removal of blind stupidity is an automatic productivity increase. Remove Obama-HRC and install Trump. You get an automatic productivity increase. Of course, with a Congress that acts as if Obama-HRC are still in control, this could take some time. We could call this the stupidity resonance effect. Either a short rap on the top of many a pointy head or a successful mid-term election (much the same thing) would break up the stupidity resonance effect.
One can only pray.
Regards,
Jim
Productivity is as much a matter of *management* as it is a matter of technology. Remember, Henry Ford’s assembly line was not technology (in the sense of machinery) per se, it was about the organization of work. (Although he also took advantage of many then-new technologies as well)
How much productivity has been lost via bad system implementations like this one at Target Canada?
How much productivity has been lost as a result of ill-advised mergers driven mainly by management ego, and the succeeding de-mergers?
Productivity is also a matter of employee skill levels and motivation.
How much productivity has been lost as a result of poor education in America’s schools and colleges, and resultant limitation in employee skills? How much productivity has been lost due to runaway credentialism, driving people to spend years getting economically-useless degrees, while needed skills go lacking?
Productivity is also a matter of the regulatory climate and the tax code, of course.
A focus only on technology leaves a lot out.
You can gain a good deal of productivity by eliminating disfunction.
I was going to say a lot more in that vein, but David Foster already did it better.
I do not see a productivity boom in our future. Any boom that would happen to start up will be killed by management, government, regulation, politics, etc. Those with the power want the status quo so they can keep their place in the world and the world in its place.
I think your statements are extremely important. After my original post was made, i reflected on how in 1950, when the 3% productivity bump was shown in the OP’s graph, America had a well trained work force. Men from the armed services were returning to the work place. These men had all been highly trained, and also had spent years learning in battle how to think on their feet. A pilot knew not only how to fly the plane, but how to maintain morale, how to bail out if attacked, how to repair the plane on the fly, and how to survive and help the crew survive if the plane went down and the crash had not killed them. All the other services provided equally fluid job skills. The civilian work force during WWII also was highly trained.
Today’s continual emphasis on degrees and certificates, often for educational goals like “a degree in communications” has become a major source of funding for colleges and universities. But there are more degree holders than jobs for such graduates. Students are placed into fields of study that are highly specialized, so the ability to analyze any overall system, something the average war time service person often had to do simply to survive, is not developed. I remember reading back in the 1990’s that one engineering school department head bemoaned the lack of students coming from rural areas. (Most Americans now live in cities or suburbs.) On a farm in the ’50’s most farmers and their kids figured out how to make repairs to vehicles and equipment that broke down. Otherwise they had to go into town and wait around, but the farm schedule didn’t allow for it. So that basic mechanical and engineering development of skills has become far less common.
I haven’t read the attached article, and will do so on the plane I’m about to catch but from the Rico summary it strikes me as a sensible take on productivity and what could await us.
Productivity growth is slowed by government complexity, rules restrictions, regulations, taxes the type of education and the general culture. If restrained from above the new innovators will tend to be the old ones as new entrepreneur activity is essential for the spread and adoption the new. Easy entry, and easy adjustment from declining industries to emergent industries is essential. That is what happened in the post war world.
We had accumulated savings, our youth had grown up rapidly and were more mature than most new college entrants so took advantage of the GI Bill. The war had produced mostly war fighting goods with some left over to be rationed to the civilian population, with the entire economy dedicated to winning the war. Thus we did not accumulate the same organized interests, and bureaucratic attitudes that repress entrepreneurial activity and bend the system toward their interests we had to scramble to meet the world’s demand for US goods, there were great accumulation of productive knowledge, technological improvements that were already adopted to fight the war that spread rapidly because our firms and our veteran new how to use these things. Now we don’t encourage our kids to grow up, to adapt, learn new things, everywhere we are hampered by special interest driven government interventions. So we know what to do and are struggling to do it, but we’re living through an attempted coup by the bureaucratic embedded interests. There is hope but it’s going to be a struggle all the way.
Tom Wolfe observed that a large % of the engineers who built the aerospace industry had grown up on farms.
My 2010 post Faux Manufacturing Nostalgia discusses cultural factors which have surely had an impact on productivity.
Agreed . In industries I am familiar with (banking, finance, insurance) the productivity brought about by technology has been offset by additional regulatory and compliance measures.
We voters could easily achieve the high government-measured productivity goal expressed by CarolJoy in her comments above. Just do the same thing we did then. She has the right idea: shift further from a society based on social cooperation and closer to one based on social coercion: bigger, more authoritarian government. Continue to expand the welfare state without limit.
(Note: I will break out the details into a separate section. That is because 99 % of Ricochet readers are practical, results-oriented people who find economics, econometrics, and economic history deadly dull, and just want to get ‘er done.)
Details, for non-results-oriented people sitting in their ivory towers who love to get down in the weeds, who take everything literally, and who talk endlessly about abstract theories. Like me.
The chart shows over the year “1950” a growth rate of 3%. But the chart explains that that is referring to the 1940’s, not the 1950’s as Carol assumed.
The actual years were (a) WWII: its buildup and execution, and (b) the era of US-funded re-creation of the destroyed capital structures of Europe and Japan.
In the definition used in the chart, the benefits of production (GDP, which is he numerator of productivity) are measured by total imputed money expenditure:
Step One: Total War
During the first half-decade, we voted to make all-out war on the Axis Powers. This caused a dramatic rise in government military spending, which counts positively toward GDP and productivity. Every bomb, bomber aircraft, and tank counted as production when built, but there was no deduction when it was blown up, nor when the men died, nor when the cities were destroyed.
The strategy worked even though human beings would say they are WORSE off giving up meat, gasoline, and other consumption goods, and getting bombs, bullets, etc., plus killing-related services in return.
Step Two: Reconstruction
The last half of the decade involved Americans producing goods to rebuild the demolished capital structure of Europe, Japan, and other places. This was a winning strategy because GDP doesn’t count the loss of a country as negative, but it counts the rebuilding of the country as POSITIVE wealth-creation.
As long as government statistics are used for measuring wealth, rather than considering wealth from the human viewpoint as Austrian economics does, we can always make things better by moving from freedom to welfare state authoritarianism.
@iwaltonYou stated: Productivity growth is slowed by government complexity, rules restrictions, regulations, taxes the type of education and the general culture. If restrained from above the new innovators will tend to be the old ones as new entrepreneur activity is essential for the spread and adoption the new.
When we are managing our business, we notice how much complexity dissuades us from becoming business partners with other firms.
So I am meaning the private sector’s complexity. (Would take to long to complain about governmental complexities and interference.)
Our publishing firm decided on Amazon to be a partner with them. After all, we needed a distributor. It was a very streamlined process. So within ten hours of making the decision to partner up with A, we were partnered up with them.
We tried to partner up with Alibris, a smaller firm that offered some of the same advantages as Amazon. (Nothing in our initial agreement with Amazon said they had exclusivity.) I spent 10 hours attempting to utilize Alibris ridiculous software to establish the names of the books we had published. I got no where. I talked to Alibris’ head guy – he was rather rude over it. Then I figured, it is probably me. I don’t easily understand computer systems any more. But then I decided: the spouse is an expert so he can do it.
He invested three hours and said the system they used was complex and also, even worse, totally unfathomable. So Amazon remained our sole business partner with regards to distribution. Of course, the governments, local, county state and Fed’s are good at being complex and unfathomable also.
And right now, in Calif., you have one set of rules for hiring people from the state and another from the Trump Admin. (I side with Trump, but that wouldn’t make it easier to deal with the state on the new “sanctuary” guidelines for hiring.)
@markcamp
Although I often find I have much in common with the libertarian approach, I fail to understand how anything as complex as the US inter state freeway system would have gotten built in the 1950’s without the Federal government doing as it did.
If you have the details on how this would have been accomplished, spell them out for us.
Of course, part of the major problem with the notion of smaller government is that there exists virtue signalling for the guys in that camp as well. As long as an expense is for the military: Great! The trillion dollar budget for the F-whatever Stealth aircraft that doesn’t work except for its simulation and not in real life is excused. But money for anything else is frowned on.
Meanwhile our grandchildren and great grandchildren will be paying for crap like that. Because although the virtue signalling accomplished by convincing people they are patriots with a capital P somehow doesn’t include that such patriots insist we pay for any of this stuff now, but only in the future.
First, the article is absolute proof of what “Great Again” means. 3% is amazing! Second, you should assume measurement error going forward. Productivity is easier to measure in a manufacturing economy than it is a knowledge-based one. How do you measure the value of entertaining each other with snarky tweets?? Third, our knowledge economy is really a lot of government, which is inherently resistant to productivity gains. If government was more productive, it would not need to grow. Add it all up and we are stuck with a measured productivity of <1%/year.