NS4053 Winter Term 2015 The Productivity Paradox Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Productivity Paradox I The Productivity Paradox, Federal Reserve of Atlanta, EconSouth, Third Quarter 2013 U.S. economy has grown slowly since recovery in 2009 Several opinions why – Depth of recession and asset destruction 2008-09 Underlying dynamics of economy are impaired and our ability to innovate new technologies is root cause of the stagnation – slow growth the new normal. Contrasting view of technology Improving so rapidly that machine intelligence and automation will replace much of human labor While overall growth will improve, technology bound to radically reshape economy making it more unequal.

Productivity Paradox II Two time periods relevant for productivity analysis: Cyclical Business cycles, expansions and recessions, booms and busts Structural trends Underlying dynamics of the economy Changes in demographics Diffusion of new technologies Structural slowdown in economic growth does not mean just a slowing of real GDP Means slowing of potential GDP The amount of real GDP that corresponds to a high rate of use of labor and capital resources

Productivity Paradox III

Productivity Paradox IV CBO estimates that estimates that three factors largely explain the slowing of potential GDP in recent years Potential employment Net new investment and Total factor productivity (TFP) Much of the slowdown in potential GDP due to Changing demographics – aging of the population and retirements Sagging of net investment (investment minus depreciation) has also lowered the economy’s growth ceiling Seems also to be a slowdown in productivity growth

Productivity Paradox V Productivity and technology Productivity growth in the long run largely drives economic growth It can also increase potential employment and spur greater investment Two widely cited measures of productivity (1) Labor productivity Straightforward – inflation adjusted output per hour worked (2) Total factor productivity Incorporates multiple factors including both labor and capital Calculated as a residual – productivity for the economy as a whole

Productivity Paradox VI TFP often called technology When examining structural trends in GDP, TFP is preferred measure of productivity Looking at data on U.S. economy cause for worry The growth of both measures of productivity have been slowing for several decades Decline in TFP is the major reason for fallng potential GDP For the U.S., separating durables and nondurables shows that TFP for durables has increased rapidly past several decades Has stagnated for non-durables Some economies have used trends to suport theories of “techno-pessimism.”

Productivity Paradox VII

Productivity Paradox VIII 1. Techno-Pessimism School Robert Gordon – economic growth may not be a continuous long run process that lasts forever Gordon classifies U.S. economic history into three industrial revolutions (IR) First IR, 1750-1830 powered by steam and railroads Second IR 1870-1900 electricity, internal combustion engine, transportation, communications running water and many other innovations Third IR 1960 to present – computer revolution, micro- processors, the Internet and mobile phones Gordon feels the third IR has been disappointing in terms of productivity Except for brief period 1996-2004 computer revolution did not materially boost productivity growth

Productivity Paradox IX Gordon’s charts shows a sharp falling off in productivity in the 2004-2012 period. Gordon outlines six headwinds to today’s economic growth Unfavorable demographics A plateau in educational attainment Rising economic inequality Globalization-driven outsourcing to inexpensive forien labor Energy price increases Environmental regulations and Large government and household debt levels Gordon foresees per capita growth for most Americans falling from the norm of 2 percent to below 1 percent We won’t be getting any poorer but we will be growing a lot more slowly because the best technological innovations have already been made

Productivity Paradox X

Productivity Paradox XI However easy to point to the fact that Remarkable advances in technology have occurred in recent years – smart phones, driverless cars and advances in machine learning Our ability to innovate is not in a structural slowdown Contradiction between remarkable advances in technology and declining productivity statistics has been called the “productivity paradox.” 2. Techno-Optimism School MIT’s McAfee and Brynjolfsson argue that long lags may occur between the time of new innovations and when they actually start paying off in products that increase productivity

Productivity Paradox XII The MIT authors believe that the labor market recovery has been weak not because innovation has slowed, but because it has been so fast it has displaced workers Other techno optimists argue that that propositional knowledge (basic science) leads prescriptive knowledge (scientific applications) More time is needed to let this feedback loop work itself out for the computer age: Science progresses with better tools which are used to make even better tools Which then led to better science Optimism that the cycle will continue as computers and the Internet have provided better access to information than ever before

Productivity Paradox XIII 3. Hybrid School Incorporates productivity and innovation ideas of both techno-pessimists and techno-optimists Agree with Gordon’s claim that recent decades have seen a scientific plateau But argues that future technological advances in machine intelligence will bring about accelerated but unequal growth Economist Tyler Cowen chief proponed of the Hybrid school Argues that land, technology and education have already been exploited for growth so later improvements on the margin will have less of an impact Like Gordon feels most advances were in the 1880-1940 period – since 1973 these have run their course with median family income slowing significantly

Productivity Paradox XIV

Productivity Paradox XV As for the future Cowen feels machine intelligence, advances in artificial intelligence, better industrial automation, Proliferation of smartphones Will create a class of very well off workers with skills complementary to machines Cowen speculates a significant minority of the labor force – 15% will have a standard of living equivalent to today’s millionaires The rest will experience stagnant income growth and dire job prospects given the rise of machine intelligence in displacing workers with incompatible skills

Productivity Paradox XVI Labor Market Implications The rate of technological innovation obviously has major labor market effects What is the relationship between new technological advances and the current skill distribution of the labor force? Skill-biased technological change – how advances in technology Can increase worker productivity given compatible skills But how they also displace certain workers Automation improvement in U.S. manufacturing Total manufacturing production has never been higher than now But the total number of persons employed in manufacturing industries fell sharply

Productivity Paradox XVII

Productivity Paradox XVIII Cowen and others see skilled based technical change as accelerating in the future See fruits of this third industrial revolution – information technology just starting to disrupt labor markets Result may be a rise in demand for both high and low skill occupations alongside a decline in demand for middle skill workers Technological automation erodes middle skill occupations. Manufacturing is one big area where these middle skill jobs exist Low skill jobs – home health aids, janitors, fast food workers are in the domestic non-traded sector – labor can not be outsourced At other end the high skill jobs are increasingly defined by computer compatible skills

Productivity Paradox XIX A cyclical phenomenon Techno-pessimists and techno-optimists are outnumbered by the mainstream view which holds: Current problems are largely cyclical Symptoms of an economy slowly recovering from greatest recession and financial crisis since the 1930s. In this view: Technological innovation has not plateaued or become permanently depressed Nor are we on the precipice of massive labor displacing technological revolution Economic growth in the long run will continue to be driven by productivity increases and thus by technology Debate between schools of thought not going away The outcome could not be more relevant to our future standard of living.