Productivity slowdown or measurement problem?

by on March 6, 2016 at 1:09 am in Current Affairs, Data Source, Economics, Science | Permalink

Here is my new column for The Upshot, asking whether an undervalued tech sector might explain a significant part of the productivity slowdown.  The answer is not really, here are a few excerpts:

Chad Syverson, a professor of economics at the University of Chicago Booth School of Business, has looked more scientifically at the evidence and concluded that the productivity slowdown is all too real. These results are outlined in his recent National Bureau of Economic Research working paper “Challenges to Mismeasurement Explanations for the U.S. Productivity Slowdown.”

…the countries with smaller tech sectors still have comparably sized productivity slowdowns, and that is not what we would expect if a lot of unmeasured productivity were hiding in the tech industry.

…The productivity slowdown is too big in scale, relative to the size of the tech sector, to be plausibly compensated for by tech progress. Basically, under a conservative estimate, as outlined by Professor Syverson, the productivity slowdown has led to a cumulative loss of $2.7 trillion in gross domestic product since the end of 2004; that is how much more output would have been produced had the earlier rate of productivity growth been maintained. To make up for this difference, Professor Syverson estimates, consumer surplus (consumer benefits in excess of market price) would have to be five times as high as measured in the industries that produce and service information and communications technology. That seems implausibly large as a measurement gap.

Don’t forget that most of the outputs of the tech sector are paid for, or they induce a higher demand for broadband and smart phones, which do enter into gdp.  And this:

Or look at it this way: The tech economy just isn’t big enough to account for the productivity gap. That gap has caused measured G.D.P. to be about 15 percent lower than it would have been otherwise, yet digital technology industries were only about 7.7 percent of G.D.P. in 2004. Even if the free component of the Internet has become more important since 2004, it’s hard to imagine that it is so much better now that it accounts for such a big proportion of G.D.P.

As my column was published, this new piece by Byrne, Fernald, and Reinsdorf (pdf) came out from Brookings.  They reach similar conclusions as does Syverson, albeit using some different arguments and paths.  I’ll be giving it some independent coverage soon.

1 Stephan March 6, 2016 at 1:37 am

So Robert Gordon is right. The wide adoption of Facebook, Twitter,Instagram, Snapchat does not have the same effect on productivity as electrificatrion and the automobile

2 Dan in Euroland March 6, 2016 at 1:41 am

Facebook et al seem like negative productivity shocks.

3 A Definite Beta Guy March 6, 2016 at 8:26 am

Celebrating Social Media=celebrating heroin fixes. “It makes me feel sooooo good, productivity must be high!”

4 Ray Lopez March 6, 2016 at 8:42 am

But, social media has a much greater effect on ‘quality of life’, than indoor plumbing, so much so that in the Third World (and I’ve seen this first hand), people buy cell phones and get TV before they get indoor plumbing. Big time. As a wag said, retweeted by TC a short while ago, if Gordon is right, then there’s no inequality in the world anymore since pretty much anybody who wants indoor plumbing can get it. So ‘our problems are all solved’. Not. Ergo there’s a measurement disparity between productivity and quality of life.

5 mulp March 6, 2016 at 1:46 pm

You can’t get indoor plumbing and running water in your house for $20 a month and share it for a fee with your neighbors, but you can get a not stupid phone for $20 a month because outsiders will pay their workers to manufacture the capital assets and then pay local labor small amounts to building the infrastructure using imported assets using outside investment cash that then gets paid most of rents on the capital asset use.

Even importing all the pipe, the overwhelming cost of water and sewer is paying labor to provide services to 90% of a community even if only 10% connect and pay. If everyone is connected for free and only then pays only rents on capital assets, you have ever the same consumer market, but 90% of the investment is paying local labor costs.

Assuming regulation goes your way and forces consumers to cooperate.

But most consumers oppose regulation because they have been taught that regulation is against individuals and only benefits the collectives: community, society, civilization, the economy.

Also, consumers have been taught that paying labor costs is bad for individuals, because individuals are not going to be a labor cost when paid a middle class salary.

6 anon March 6, 2016 at 10:58 am

Gordon’s problem in a nutshell:

The price to sequence a full human genome has fallen below $1,000. When will this show up as worker productivity down at the local Walmart?

It seems a kind of economists’ conceit that since everything is a market, everything can be measured by massive simplifications like productivity or surplus. Technology is more like knowledge than it is like sales. Not all knowledge sells.

We concentrate on things that seem mispriced, like the utility of Twitter, but there is a lot more arbitrary selection going on. I am sure we can think of examples of great technical achievement that markets don’t even care about.

VR? It may yet go down as a boring achievement that drags down “productivity” through lack of output.

7 E. Hrding March 6, 2016 at 1:47 am

Come on, guys, you all have Twitter accounts. Click on the link and follow me.

8 RM March 6, 2016 at 2:49 am

I feel that in some of these discussions we are talking past each other and we need better terminology and definitions. Surely, we should not lump technology that allows us to design cars in 1/3 of the time and grow twice the food on an acre with technology that allows us to cyber-hangout with friends.

I understand arguments that productivity growth in the former may have been exhausted, but I don’t see the pertinence of ever bringing up Facebook. It is like arguing over whether TV in the 1950s slowed productivity. I assume that TV did not slow productivity and if it did not, there is no reason to believe that Facebook does. (And if it matters, TVs also had indirect contributions to GDP.

9 anon March 6, 2016 at 9:36 am

“Talking past each other” is exactly what I thought as I read the Upshot article.

It is one argument whether productivity leads to wage growth. (Yes)

It is another whether productivity captures all technological progress. (No)

This should lead to the question of why some great tech is essentially nonmarketable. Or why some good old tech like printed newspapers become less so.

10 ross March 6, 2016 at 10:05 am

“need better terminology and definitions”

Agree. My immediate impression was that terms productivity, production and product were being used almost interchangeably. Results in a muddled, pointless essay.

11 Rock Lobster March 6, 2016 at 2:52 am

I say this as somebody who is admittedly not an expert on the topic, but….

The entire conceptual framing of this debate seems off to me. Even if the internet is flooding us with all sorts of free or quasi-free goods, wouldn’t we still see additional spending in other areas of the economy to offset the savings produced thereby? For example, because of Wikipedia, I now have no need to spend X hundreds of dollars on a print encyclopedia. But I’m going to take that money saved and spend it on a bigger house or a trip to Miami, or save it (and have it fund capital investment), or maybe “spend” it on more leisure, in which case it would still flow through to productivity metrics even if we don’t see it directly in GDP. Perhaps we’ve simply married our housekeepers, to use the old expression, turning a cash-for-encyclopedias business into one in which encyclopedias are produced for hobbies or status, and so Wikipedia is buried under measured GDP as non-market household production.

On the other hand, using Uber as an example, are we properly measuring the benefit of having a taxi on demand instead of having to call way ahead of time like we used to? That’s tough to say but isn’t all that different from the quality adjustment headaches that have plagued us for decades.

What is Google Maps worth to people? A lot I’d say, but Google also maintains that service insofar as they see it being worth the ad revenue generated from it. So is it conceptually different from radio ads?

I’m admittedly thinking out loud a bit here, so my opinion here could be way off. For what it’s worth I hope there’s a decent discussion on this topic in the comment section, which, excepting a few hot-button issues that get a lot of attention, has been frustratingly plagued with trolls and incoherent rambling.

12 Graham Palmer March 6, 2016 at 3:52 am

Agree on Google Maps. I think a lot of the discussion around “free” maps is a furphy. Nokia blew $7 or 8 billion on mapping, Google must have spent this or more, same with Apple. Google is simply bundling maps to improve the perceived value of Android products. All of this is measured in GDP. Most professional drivers (couriers etc.) I see are using Tom Tom’s anyway.

13 A Definite Beta Guy March 6, 2016 at 8:42 am

Not different from other quality adjustments: Agreed in full.

Furthermore, why would anyone assume on-demand Internet today has greater consumer surplus than past inventions? Women have gone into the labor force, but have cut their house-work in half.
http://www.pewsocialtrends.org/files/2013/03/SDT-2013-03-Modern-Parenthood-34.png

That’s starting at 1965, so that does not capture the significant gains made in the decades before then. The Industrial Revolution automated probably 1/2-2/3 of our drudgery away. That’s much higher “consumer surplus” than freakin’ Farmville.

Additionally, the environmental movements since the 40s have improved QOL substantially. I know Republicans complain about the EPA, but a lot of what the EPA does involves telling cities they can’t dump raw sewage into rivers. That’s good, because I don’t like drinking human feces. Silicon Valley hasn’t done all that much to prevent me from drinking human feces.

BTW, look at these awesome innovations in plumbing tech that Silicon Valley didn’t invent:

Silicon Valley is EXTREMELY arrogant to think their little “accomplishments” have anything on the massive infrastructure work on:
-Massive public education
-Massive road construction
-Massive housing boom
-Massive environmental clean-up

The tech monsters helped out a lot in our effort to beat the Commies, which is their largest contribution.

14 Jonathan Bechtel March 6, 2016 at 2:52 am

What about the notion that we do have increasing productivity, it’s just that most of those gains are being internalized by the actions of the machines themselves and not much of it flows to labor, who are increasingly relegated to menial tasks they can’t perform?

That’d explain why we have increasing output but stagnant wages.

15 tokarev March 6, 2016 at 4:10 am

Tyler is too polite to say it, so I guess I will. The Silicon Valley/tech-mogul type guys who push this measurement problem narrative are just being self-serving. They’re saying “we produce all this stuff that makes your lives so much better and you’re barely paying us for it!” I’ve even seen 100% rentier-types like Paul Graham pushing this narrative, acting like Silicon Valley types are so much more noble than Wall Street guys. No one is fooled. Just ask the people who throw rocks at Google buses.

16 Nathan W March 6, 2016 at 4:34 am

Today’s genius developers are putting their brains into projects like, inventing the next Farmville or what have you. Investors pile their money into projects with zero contribution to the productive potential of the nation (probably au contraire, since addictive games are not good for productivity).

This has got to explain at least a few percent of the situation.

I know some serious gamers, and they get extensive practice in some serious collaborative problem solving skills and spend perhaps 20 hours a week or more playing, yes, addictive games, but then go to work and solve the (bleep) out of real collaborative world workplace issues in engineering, pharmaceuticals and computer programming. I know a couple other faux gamers, who spend 20 a week or more chasing dots around a screen and the like. “Their business”, some will cry. But look at the productivity stats. They may as well be on crack.

I was standing in line at a fast food restaurant the other day, and a 4 year old child in front of me was playing a game on an app on a mobile phone. I was stunned at the intelligence, memory and reaction time evident at the level of a 4 year old. Games are definitely not all bad. But rest assured, the people who produce these games do not have the social benefit in mind – they want to get people addicted to some useless game, and then charge them for credits which will alter the player’s game so they are faster and better than people who don’t pay the credits. Getting good at stuff is hard, but for $20, people can take pride in being the best dot chaser, or what have you, in their social group.

17 Moreno Klaus March 6, 2016 at 5:32 am

I am not sure if that such a good idea… a 4-year old already addicted to iPhone?

18 Axa March 6, 2016 at 9:12 am

A bit self-righteous.

The world/society/economy needs different people. Diversity is good. Due to your values, you’re horrified of a 4 year old playing with an Iphone but that child will be happy worker later in life. In my job experience, people around is unhappy for working 8 hours a day in front of a computer screen. Almost everyone visualizes a happy life in a different way. The irony is that it’s sedentary people that complain about computers. I’m happy with my day long computer job and biking to work with a weekend on the outdoors.

As a lifelong gamer, I’ve only found that gaming affects productivity when you trade sleep hours for gaming. But, people trade a lot of things for sleep: party, drinking, taking care of children, gaming.

19 Nathan W March 6, 2016 at 9:49 am

The example of the 4 year old was intended to be a positive. She was honing motor skills and developing memory abilities in a fun way. At 30 years old with such games, however, well, whatever, their business, but not exactly an economic positive. You don’t have to be self righteous to make such an observation.

20 Axa March 7, 2016 at 6:31 am

Really? Why so judgemental with 30 years old playing candy crush? People is just trading TV time for any type of game time http://www.marketingcharts.com/television/are-young-people-watching-less-tv-24817/

The only issue here is that very serious people watch TV while not serious people spent time on games.

21 Nathan W March 7, 2016 at 6:44 am

It’s not like I called them lazy bums or a waste of air. I just pointed out that their activity is of no benefit to the broader economy. That’s observation, not judgment. I’m not one of these people who thinks that the inherent value of a person is based on their contribution to GDP.

I guess you’re one of those types who would think it judgmental if I so much as mention to an alcoholic what sort of holidays or gizmos they could afford if they spent half as much money on alcohol. I know an alcoholic who I adopted precisely such an approach to – he went 90% off the booze for a few years, bought lots of fancy electronics and tools, took a few nice holidays, and eventually returned back to his old ways (lost all the gizmos and tools in the process). No judgment from me, but I sometimes point out that he seemed quite content with all those toys and holidays. I can be judgmental about people who are unnecessarily assholish, but not lifestyle decisions – just point out that there is an opportunity cost and let them make their own decisions.

22 Jan March 6, 2016 at 6:28 am

I would not expect the author of the Great Stagnation to write a column saying that undervalued tech sector might explain a significant part of the productivity slowdown, even if he thought that were true.

23 Ray Lopez March 6, 2016 at 8:46 am

TC is smarter than you think. He’s said (in his book) that the Great Stagnation is ‘temporary’ without specifying what time frame. So he’s keeping is options open, like the chess master that he is. He’s hard to beat (like a chess master); he has eyes everywhere and has already figured out what you are planning to do or say, three moves ago.

OT–on my bookshelf and will be read soon: “The World in 2020” by Hamish McRae, published in 1994. I bet he was overoptimistic on tech progress.

24 Todd Kreider March 6, 2016 at 2:54 pm

Tyler did specify a time frame:”several decades” , until or into the 2040s.

By the way, I saw “The World in 2020” in a bookstore in 1995 or 1996 but put it down when I saw there was nothing on exponentially increasing computing power in it. My memory is that it was more of a geopolitical futuristic book that seemed more common in the 1990s.

25 carlolspln March 6, 2016 at 4:18 pm

‘The World in 2020’:

Deja lu [&, yes, overoptimistic on tech progress]

26 rayward March 6, 2016 at 7:03 am

Cowen’s friend Peter Thiel distinguishes companies that deal in bits and companies that deal in atoms, that investors have devoted too much capital to the former and not enough capital in the latter, and that as a result we’ve experienced lots of innovation in the world of bits but not so much in the world of atoms. His explanation: regulation. The world of atoms is heavily regulated but the world of bits isn’t, drawing capital away from the former and to the latter. I suspect that Cowen’s next post on the subject (the why? post) will likewise put much of the blame on “regulation”. The government did it! Whatever. My formulation is a little different from Thiel’s: today’s tech companies in the world of bits didn’t build a better mousetrap, they built a better way to sell a mousetrap. The world of bits doesn’t make life better, it just reinforces the desire for more and better products made in the world of atoms. What changed is that the atoms moved to China (and India, etc.), while those who desire the products made in the world of atoms stayed in America (and Europe, etc.). As to why they moved to China, I’d say for the same reason doctors have affairs with nurses and techs at the hospital: because they can. Did “regulation” induce the move? Do you want to breathe the air in China? Companies in the world of atoms learned that they could move production from relatively high wage regions in the northeast and mid-west to the relatively low wage regions in the south and southwest. Having learned that lesson, they took it the next step and moved production from the relatively low wage regions in the south and southwest to the really low wage regions of the less developed world. Sure, it looked good in the short-run, but not so good in the long-run when secular stagnation came due. Just like the doctor’s experience: sure, that young nurse looked good in the short-run, but not so good in the long-run when the alimony came due. Like doctors, companies are often short-sighted, preferring short-term actions to increase profits today even if it means lower growth and profits in the long run. Yep, company executives, and the owners of capital who finance them, are a lot like doctors.

27 Derek March 6, 2016 at 7:32 am

If Apple wanted to open an assembly plant in the US, what would they face?

Nothing marginal.

Two to three times the cost, time and risk simply to build the place.

Not enough and too expensive production engineers. Each one would expect wages to pay off the 5 or 6 digit debt incurred to qualify. Same all the way down the line.
The large number of secondary manufacturers with their specific expertise don’t exist.
Etc.

28 Ray Lopez March 6, 2016 at 8:51 am

Yes, agree with Derek, in fact pollution in the USA is governed by the EPA according to local standards, hence it’s harder to open a toxic factory in downtown NYC than in the desert of Arizona. For this reason Intel opened a chip plant (which produces all kinds of nasty chemicals) in Arizona, as well as in Costa Rica (a tropical biodiversity hotspot, lol, though I’m sure they got some tax breaks for doing so) and probably somewhere in Asia (soon? without Googling it).

29 Derek March 6, 2016 at 7:18 am

If your economy is structured so that a small percentage is competitive, the rest either service industries or subsidized, maybe this is what it looks like.

Or you have an economy made up of productivity choke points that see once a generation jumps in productivity but are not amenable to the constant improvements in process that you see in manufacturing. For example, an engineer may see a jump in productivity by the introduction of spreadsheets, or cad. That was 25-30 years ago. The engineer still needs to apply their knowledge and experience to issues at hand, do all the calculation, document it all, see the project through, measure, test, etc. The process hasn’t changed because the process is built around the choke point of the professional capability. The added economic activity that an engineer once engendered happens somewhere else; the raw materials processing, manufacturing and assembly.

Or the productivity improvements from technology applications don’t exist, or end up with a net decrease in economic activity.

For example, there was a project I was involved in recently. A big chunk of cash was applied to installing technology that used maybe 1/3 of the energy, required half the people, and would cut sales or at best be flat. More profitable, dependent on the availability of cheap capital.

Others that I see are the application of technology to decrease the costs of the higher volume goods while at the same time simply dropping a wide array of product offerings where there is demand but not enough to justify the capital outlays required to produce them at the same level. More profitable, simpler business; you can get rid of vast swathes of expensive people who knew how to service the market. The market changes in response; fewer larger.

It is very odd, there are vast swathes of the marketplace that are underserved, but with diverse needs where the costs of meeting those needs is too high. Technology is wierd; Apple created a product line essentially predicated on the notion of limiting function. The product being ubiquitous made those limited functions the norm. If your requirements are outside the norm, you are almost at pen and paper mode. And yet they are extraordinarily profitable, with highly paid engineers engendering economic activity somewhere else.

I just experienced the wierdest thing I have ever seen in my years in business. A large customer had this complex and arcane proposal software run by who knows. Entering data was similar to entering stuff on a floppy disk dbase machine from the 80’s. There was this grandiose obviously chemically induced idea behind it, which anyone with a lick of sense would realize was impossible. It wasted hours of time of the most valuable people in firms all over the country, all muttering under their breath.

It came down to one number. The geographic reality intruded, and a guy making 10 phone calls could have gotten better results with far less time wasted.

A vast expenditure of energy, thought, experience, expertise that will ultimately shrink the company and the industry. Someone will get a promotion for pulling it off, cementing a profound stupidity, and in half a decade economists will be mystified.

30 Ray Lopez March 6, 2016 at 8:54 am

Either you worked for fools, or, there’s something else going on that’s eluded you. Have you considered the owners were laundering money and needed a ‘legitimate business to build’ to waste money on (to launder it)? Stranger things have happened.

31 Kevin- March 6, 2016 at 9:37 am

It is very common to work for people who are not fools in the general sense, but who are supremely foolish about things (like big software projects) that they don’t fully understand. Happens ALL the time, especially at big companies.

32 Benjamin Cole March 6, 2016 at 7:20 am

Is the productivity slowdown global in advanced or developing nations? If so, why? Could we be mixing up a slowdown in demand, and the related higher cost per unit, with a decrease in innovation?

Side note: the smog in Los Angeles has been reduced by 95% in the last 40 years. Are improvements in environmental results baked into the productivity numbers?

33 Ray Lopez March 6, 2016 at 8:57 am

Yes, these improvements show up in longer lifespans, though as people age they work less, so arguably the environmental effects, adjusted for age, are negative (meaning if we had smog and more young people, with said young people dying in middle age or requiring expensive hospitalization, we’d have greater GDP though quality of life would be less).

How’s those turkeys going? Mine are growing so fast, before my eyes.

34 hmmm March 6, 2016 at 8:51 am

With a shortfall in AD, is it possible that automation has moved a bunch of people to lower productivity work and also moved some out of the job market entirely? Blaming the productivity slowdown on tech seems odd to me, but I have better things to do than understand how this is measured at a detailed level.

Software will continue to eat the world.

35 Axa March 6, 2016 at 8:58 am

Perhaps Tyler is barking at the wrong tree.

SV is not going to changes things alone. They need to cooperate (add value) to other products and services. Air travel today is completely different compared to 20 years ago, labor productivity keeps raising. Also, air travel safety needs information technology, I don’t imagine how complicate would be to keep track of planes, their components and maintenance using paper, pencils, phones and mail. For banking, I haven’t talked to any human employee since the last time I opened a new account 3 years ago, but I’m aware my parents can’t do that.

Perhaps productivity in similar to science, it advances one death at a time. Productivity will increase when the generation that uses paper checks and needs a human employees for plane travel dies.

36 Slocum March 6, 2016 at 9:27 am

I’d argue both sides in a way. On the one hand, we have done a bad job in measuring consumer surplus and quality improvements such that, the proposed idea that median American living standards have not risen since the 1970s (based on CPI adjusted income measures) are simply preposterous — very easily seen, for example, in Don Boudreaux’s 1975 Sears Catalog exercise:

http://cafehayek.com/2006/01/working_for_sea.html

On the other hand, I agree that there’s no way that a great deal of productivity gains in the past decade have been hiding in tech. In fact, I believe that the pace of development in tech itself has declined during that period (most noticeably in the last 5 years). It’s gotten to the point that I no longer bother to upgrade my electronics unless they break, simply because the pace of change has slowed. My digital SLR is 5 years old and differs little from the latest models. The same is largely true for my laptop, tablet, smartphone, etc. The days when eager buyers camped out awaiting the release of the latest generation of iPhone (or anything else except, apparently, Air Jordans) seem to be clearly behind us.

37 anon March 6, 2016 at 9:49 am

I think we are on the same page that consumer surplus, productivity, and rate of progress are different things .. but people went from waiting for the next IBM PC release to waiting for the next Apple iPhone. The frontier moved rather than disappeared. And of course anything gene related rages.

38 Slocum March 6, 2016 at 10:53 am

I don’t remember anyone lining up for the original IBM PCs — they were far too expensive (and really targeted at businesses rather than consumers). People did line up for Windows 95, though, which is funny now. But at present, we seem to be in an era where each successive ‘next big thing’ is either a dud (3D TVs, smart watches) or a niche product (camera drones, VR headsets). I see analysts saying things like “Well, maybe Apple hasn’t done much lately, but wait until the iPhone 7 comes out!” But why? What could possibly be exciting about it?

39 anon March 6, 2016 at 11:08 am

There was the same perceived obsolescence we see now with phones. The XT made the PC obsolete. The AT the XT. Then everything broke into confusion as clones competed on Intel chip releases. From about 1981 to 2001 it mattered very much which generation you had. Gamers continued from there, but home/office users slowed down.

Speaking to your broader point, it isn’t that computer tech doesn’t move, it is that we have so crushed cost that we are bored by it. We can buy $35 Raspberry Pi computers that in 1980 we would have denied the Soviets as “supercomputers.”

Is it the fault of the Pi or us that we don’t buy one and do some supercomputing?

Geez we are spoiled by cheap computation that we throw it away on Bitcoin.

40 Slocum March 6, 2016 at 11:51 am

I think you’re kind of missing the point. During previous decades, it was pretty easy to see what was just beyond the horizon and *that people would really want* (faster, bigger screens, more storage, higher resolution, better colors, lighter, slimmer, longer battery life, faster networking). But in all these areas, we’ve gotten to the point where things are so good that marginal increments really aren’t very compelling. So tech companies are searching desperately for different kinds of products that haven’t yet matured, and they’re mostly flailing. It’s certainly not a bad place for consumers to be — our tech is wonderful and cheap, but it’s hard to see how existing categories are going to get much better. iPad sales have been declining for a quite a while and now iPhone sales have started shrinking too.

41 anon March 6, 2016 at 1:28 pm

We both think this Illustrates our points.

Again, mine is that rapidly advancing tech does not always make markets.

You say $35 supercomputers are not a big improvement, I say you are choosing not to see them that way.

42 Ray Lopez March 6, 2016 at 11:54 am

All of this thread ties indirectly with this controversy:

https://en.wikipedia.org/wiki/Cambridge_capital_controversy

In a nutshell, it’s hard to say whether you can, as in the “Sears Catalog” example, sum of goods according to a ‘real’ vs a ‘nominal’ value. Not just between different years (like comparing today to 1970) but even in the same year!

Check out the link above. In my mind it indirectly goes to whether the Austrian economists are right in saying “there’s no such thing as Aggregate Demand, Aggregate Supply or even ‘GDP'”

43 anon March 6, 2016 at 9:55 am

As a simple observation, technology made possible Mechanical Turk.

In that one stroke technology lowered output per worker.

44 Nathan W March 6, 2016 at 10:05 am

Let’s say you have a production process where $1000 input results in $1000 output. A “perfectly competitive market”, say.

Then, there is a technological innovation. Production costs drop to $500. But, because it’s a perfectly competitive market, the sale price is now only $500. Imagine, for simplicity, that this allows you to double sales. We’re back at $1000 input and $1000 output.

The productivity stats will tell you that productivity is stagnant, because the measures are the dollar values of inputs and the dollar values of outputs. But, in the real world we have twice the goods.

Without picking at the simplicity of the example, in principle is this not going to pre-dispose the stats to understate the productivity gains, for the fact that competitive pressures imply that the dollar value of the output should still roughly equal the dollar value of the input (accounting for a “reasonable” profit)? This seems so obvious that I feel I must be missing out on some obvious reason why it shouldn’t apply, but it seems to make sense …

45 Ray Lopez March 6, 2016 at 11:57 am
46 indybones March 6, 2016 at 10:28 am

what if tech development in the past 15 years created instead a surge of efficiency rather than productivity per se? (in the Uber example, car purchases did not surge, TC predicts that given Uber tech we are far above the vehicle equilibrium).

i gather from those wiser than myself that the value saved there should shift elsewhere, to which i naively ask: could it matter at what point in the economic cycle this efficiency explosion occurs?

i will say that while 5x effective productivity may be too high, it doesn’t seem that far off. how quickly we forget what life was like in 2004.

where do we expect the saved “productivity” to go when, for example, the New York Times stops printing physical newspapers? i know that’s a silly question but really.

47 Kevin Frei March 6, 2016 at 10:55 am

My roommate Ben said when he was growing up his fantasy was to be so rich that he could buy a videotape collection of every pro wrestling match ever televised. Now he gets that and more for a subscription to the WWE channel, which he watches constantly. To childhood Ben’s imagination, the consumer surplus is over a million dollars.

48 Todd Kreider March 6, 2016 at 3:51 pm

TC:”Arguably the Internet brought its biggest gains in the mid- to late 1990s, and in those years measured economic productivity was in fact very high.”

I’m curious if anyone can back up this claim. It isn’t unreasonable although as written looks circular. “The Internet brought its biggest gains…” To what? Productivity, right?

In the U.S. the internet went from 20 million users in 1995 to 120-150 million users in late 1999 (15% to 45% of adults), where a user was counted as someone who occasionally used the internet to check email, etc. But that was still 90s Internet with little broadband, and poor search engines.

From early 2000 to early 2005, the number of users had expanded from 45% to 63% but broadband (in the home) had gone from 5% to 30%. Google searches and PDFs were now common.

49 William March 7, 2016 at 11:15 am

The article cites “productivity slowdown” several times.
Productivity can be defined as: “A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.
Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency.”
Source: http://www.businessdictionary.com/definition/productivity.html
Note: No mention of *increased* anything.
What the article above is concerned with is not Productivity but Productivity growth. Quite a different thing.

The original article’s opening line is “The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004”
http://www.nber.org/papers/w21974
Note the word “growth” – it’s important.

Should we really believe that productivity can continue to grow for ever? Surely the slowing down of growth is actually quite normal once any system has reached a level of maturity. It could be argued that the slowing down of growth is actually healthy.
The deeper question is why would anyone confuse X with the growth of X?

Unless of course…..

Yaaaaaah!! We have a problem Marge – Bart has stopped growing. What are we going to do? It’s a catastrophe!
Oh Homey, that just what kids do – eventually. It’s not like he’s the economy, he’s a boy.
Doh

Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.
Kenneth Boulding back in 1973

GDP?
I actually question the sanity of anyone who used GDP to measure anything other than GDP.

It is this sort of double-speak that allows the people we (should be able to) trust to lull us into a false sense of security by talking about the deficit (how much we are not keeping up debt payments) rather than mentioning the debt – around $19,000,000,000,000 in the US http://www.usdebtclock.org/ and £1,660,000,000,000 in the UK http://www.nationaldebtclock.co.uk/

“If annual borrowing falls from £80bn to £50bn, the annual deficit is lower. But, at the same time, the national debt (total debt) is still rising.” http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/
Your average punter probably reads that as “well there is some good there, at least the deficit is falling”. Try dealing with your credit card like that.
True madness.

50 Jason Bremer March 7, 2016 at 5:06 pm

Tyler – Many forms of consumer surplus are realized throughout the economy and across sectors. Why does it make sense to focus on the benefits within the tech industry, or relative to the size of the tech industry? Thanks!

51 Dallas Weaver March 7, 2016 at 9:48 pm

A productivity slow down at a time of exponential increase in scientific knowledge is even more crazy than just thinking about a productivity slowdown using the conventional factors like labor and capital. The number of innovations is rapidly growing, but in area after area they don’t seem to move into the markets.

We do have growth in the permissionless silicon valley type businesses, where no bureaucrat can say NO or delay.

I just went to a lecture by some agricultural experts who pointed to hundreds of fantastic innovations that are blocked/delayed by regulators. In other fields that I deal with, I see the same thing of innovation being blocked by regulators. As a consultant, I recommend that clients leave the US, if you want to do anything that takes regulatory approval and is truly innovative. Anything new to the FDA and a hundreds of other agencies can become a decade long, 100 million dollar investment in something that may have too small of market niche to make sense.

Comments on this entry are closed.

Previous post:

Next post: