When economists talk about America suffering a “great stagnation,” that is the conclusion they draw from the data represented in these two charts, via a new Goldman Sachs research note:
The two charts basically show a multi-decade slowing in US productivity growth, except for a pop in the mid-1990s through the mid-200os. If there was going to be a big technology-driven productivity and innovation surge from the Information Technology revolution, it seems to have come and gone during the second Clinton term and first Bush II term. One could blame the Great Recession, of course. But the downshift began before the downturn and continues six years into recovery. And Goldman is very disappointed, offering this gloomy forecast (bold is mine):
The IT contribution [to productivity] has fallen back to levels last seen in the early 1980s, and measured productivity growth has averaged 1½% over the past decade (and just ½% over the past three years). For analysts who had held onto the view that at least part of the weakness was a cyclical and temporary consequence of the deep slump in output and capital accumulation, such as ourselves, the recent numbers have been a clear disappointment. On the back of this disappointment, we have reduced our working estimate for long-term productivity growth from 2% to 1½%, which takes us back to the average pace of the 1973-1995 period.
This is really important. Slower productivity growth means living standards rise more slowly. But there’s a catch here: Goldman thinks that while the official numbers show an IT-led productivity slowdown, other metrics do not: “Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market.” It was just the opposite when the productivity slowdown began in the 1970s.
Maybe metrics devised for a wheat-and-steel economy of physical commodities are poorly suited for one experiencing rapid growth in software and digital content. Maybe there is a systemic understatement of productivity and GDP growth:
But is the weakness for real? We have our doubts. … Specifically, we see reasons to believe that the well-known upward biases in the inflation statistics related to quality changes and the introduction of new products are particularly severe for software and digital content. Quantifying the effects is difficult, but it is not unreasonable to think that they could offset a substantial portion of the measured productivity slowdown. … How much better are the inventory management systems that retail companies contract out or develop for their own account compared with those of twenty years ago? How much better is Grand Theft Auto V than Grand Theft Auto IV? And how much more value do we now derive from our internet connection compared with a decade ago? It is very difficult for a statistician to know, and when we do not know our default assumption tends to be that there is little change.
Mismeasurement of inflation has probably for years understated real GDP and income growth. But the IT revolution has likely made that understatement a worse and growing problem. (Goldman’s conclusion is also very much sync with the innovation and productivity research of AEI’s Stephen Oliner.) Now, even if Goldman is correct — and one should should “be skeptical of confident pronouncements that the standard of living is growing much more slowly than in the past” — nothing here argues for complacency. Some pretty smart people are still worried about “economic calcification.” In any event, slowing labor force growth will make it tougher to generate fast economic growth without higher productivity and increased innovation. We should still reform taxes and regulation to help entrepreneurs, immigration law to attract more brainiacs, and invest more in basic science research. But things overall may be better than we think, and strong job numbers may be a better gauge of the economy than anemic GDP numbers.
Also: 2 views on why US economic growth is better than we think — and has been for awhile
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