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

2. 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
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.

3. 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

4. Productivity Paradox III

5. 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

6. 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

7. 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.”

8. Productivity Paradox VII

9. 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, powered by steam and railroads
Second IR 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 computer revolution did not materially boost productivity growth

10. Productivity Paradox IX
Gordon’s charts shows a sharp falling off in productivity in the 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

11. Productivity Paradox X

12. 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

13. 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

14. 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 period – since 1973 these have run their course with median family income slowing significantly

15. Productivity Paradox XIV

16. 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

17. 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

18. Productivity Paradox XVII

19. 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

20. 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.