With The New Yorker launching a new online science-and-technology hub today, along with our Elements blog, I thought it a good time to step back and look at the impact of the communications revolution in a broader way than asking whether Samsung is becoming the new Apple. (Although that?s an interesting question.) Ever since I joined the magazine, in 1995, the Internet and technologies associated with it have been transforming the American economy in ways too varied and myriad to retread here. Even now, though, almost twenty years on, there?s precious little agreement on what it all means for productivity growth and living standards, which usually amount to pretty much the same thing over the long term. (Over decades rather than months and years, wages and salaries tend to track productivity growth pretty closely.*)
Back in the late nineteen-nineties, there was a lot of optimism about the future, and it wasn?t all emanating from those lucky souls who had gotten in early on the I.P.O.s of companies like Yahoo and Amazon. Many economists, with Alan Greenspan prominent amongst them, believed that over time the heavy investments in new information and communication technologies (I.C.T.) that companies were making would lead to rapid growth in productivity and wages. There was much discussion of a third industrial revolution, with the Internet playing the role that the steam engine played in the early nineteenth century and electricity played in the late nineteenth and early twentieth centuries.
For a time, the Labor Department?s productivity figures appeared to support the idea of an Internet-based productivity miracle. Between 1996 and 2000, output per hour in the non-farm business sector?the standard measure of labor productivity?grew at an annual rate of 2.75 per cent, well above the 1.5 per cent rate that was seen between 1973 and 1996. The difference between 1.5 per cent annual productivity growth and and 2.75 per cent growth is enormous. With 2.75 per cent growth (assuming higher productivity leads to higher wages) it takes about twenty-six years for living standards to double. With 1.5 per cent growth, it takes a lot longer?forty-eight years?for living standards to double.
No wonder people were excited. If the productivity growth rates of the late nineties could be sustained, Americans of the future wouldn?t merely be richer than their parents: they?d be twice as rich. Even after 2000, when the Internet stock bubble burst, productivity growth remained high. In fact, it rose further. During the four years from 2001 to 2004, output per hour increased at an annual rate of 3.5 per cent. Despite the mayhem on the Nasdaq, the Internet-productivity miracle seemed to be alive and well. And with all the talk of ?Web 2.0??2004 was the year that Tim O?Reilly, a notable Silicon Valley booster, held a conference devoted to that topic?the technology optimists argued there was plenty of scope left for further gains. Broadband penetration was rising rapidly. Social networking was in its infancy, as was the mobile revolution. Once practically everybody was permanently online, with the entire resources of the Internet at their fingertips, surely productivity would take another quantum leap.
It didn?t happen!
Since the start of 2005, productivity growth has fallen all the way back to the levels seen before the Web was commercialized, and before smart phones were invented. During the eight years from 2005 to 2012, output per hour expanded at an annual rate of just 1.5 per cent?the same as it grew between 1973 and 1996. More recently, productivity growth has been lower still. In 2011, output per hour rose by a mere 0.6 per cent, according to the latest update from the Labor Department, and last year there was more of the same: an increase of just 0.7 per cent. In the last quarter of 2012, output per hour actually fell, at an annual rate of 1.9 per cent. Americans got less productive?or so the figures said.
Now, productivity bounces around quite a lot from month to month, and one bad quarter doesn?t make a trend. Still, if the sluggish rates of productivity growth we?ve seen over the past two years were to persist into the indefinite future, it would take more than a hundred years for output-per-person and living standards to double. True, that?s a worst-case scenario. If the experience of the past decade has taught us anything, it?s that extrapolating from small data sets is dangerous. But the slowdown in productivity growth has been sufficiently dramatic, and it?s lasted long enough, to raise two important questions: Where did the technology optimists get it wrong? Could they still be proved right?
Some optimists say that the Great Recession and its aftermath has distorted the recent figures, and that once G.D.P. growth rebounds to more normal levels productivity growth will pick up. During a typical recession, firms tend to hold onto more workers than they need, operating their plant and machinery running at reduced levels. This has a negative impact on output per worker; but when normal working conditions resume, labor productivity rises. Over the coming years, that could well happen. But there are at least two reasons why it might not.
First, firms didn?t do much labor hoarding in the recent recession. As demand for their products fell in 2008 and 2009, they laid off millions of workers. Consequently, there?s less reason to believe that, as output growth picks up, we?ll see a big upswing in productivity growth. Secondly, the dropoff in productivity growth predated the recession, which began in December, 2007. In the three years from 2005 to 2007, the annual rate of growth in output per hour was just 1.4 per cent?less than half the rate during the previous nine years. Other measures of productivity growth, which take account of capital inputs as well as labor inputs, show a similar slowdown in the period after 2004. To quote John Fernald, an economist at the Federal Reserve Bank of San Francisco, who has published his own research on the topic: ?Trend productivity growth appeared to slow several years before the Great Recession.?
But if the slump didn?t cause the slowdown, what did? One possibility is that, compared to things like the power loom and the internal-combustion engine, recent technological marvels, such as the iPhone and the iPad, aren?t really so marvellous. Ten or fifteen years ago, there were hopes that new technology would lead to big productivity improvements in service industries such as health care, where doctors would be able to share patient information and carry out remote diagnoses, and banking, where people could manage their own payments online. But these hopes haven?t been fulfilled. In a provocative paper that received quite a bit of attention last year, Robert Gordon, an economist at Northwestern University, who is a longtime technology skeptic, pointed out that truly historic inventions fundamentally change modes of production and working, usually by replacing human effort with something more powerful. Computers clearly did this, too. But, as Gordon pointed out:
Many of the inventions that replaced tedious and repetitive clerical labor with computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.The iPod replaced the CD Walkman; the smartphone replaced the garden-variety ?dumb? cellphone with functions that in part replaced desktop and laptop computers; and iPads provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines.
Gordon surely has a point. Anybody who spent part of their Monday workday following opening day at Yankee Stadium, or catching up on the weekend celebrity gossip, would readily concede as much. Smart phones and tablet computers are great tools for communicating and doing research. They also make it a lot easier to do stuff that adds little or nothing to G.D.P., and may even detract from it, such as spending some of your working hours e-mailing with your friends and posting pictures of your cat on Facebook.
Of course, to the extent that people enjoy doing this sort of thing?and they clearly do?the communications revolution is improving human welfare, but not necessarily in a way that shows up in the productivity figures.
Another way that the official figures may simply be understating the economic impact of digital technology is in not giving enough emphasis to the provision of new goods, such as Web video conferencing, global-positioning-satellite phone apps, and mobile-phone banking, which simply didn?t exist twenty years ago. Among economists, it is well known that time-series data on sales and prices, which is what agencies like the Labor Department and the Commerce Department gather, can seriously understate the impact on living standards of new inventions. (Gordon himself has written about this.)
Finally?and this is probably the technology optimists? strongest argument?it may be too soon to judge the impact of things like social networking, mobile communications, and G.P.S. In 1712, Thomas Newcomen invented the first successful steam engine. It took another sixty-five years until Richard Arkwright used steam power in his Derbyshire cotton mill, and more than eighty years until Richard Trevithick?s steam locomotive hauled a train from an ironworks near Merthyr Tydfil in South Wales. Things have sped up since then. Still, it wasn?t until the late nineteen-nineties, twenty years after the first desktop computers were marketed, that the building out of the Web fulfilled the promise of personal computing. Perhaps something similar will happen again. Earlier this year, in a response to Gordon?s paper, Kevin Kelly, the Silicon Valley writer and founding editor at Wired, wrote:
In the year 2095 when economic grad students are asked to review this paper of Robert Gordon and write about why he was wrong back in 2012, they will say things like ?Gordon missed the impact from the real inventions of this revolution: big data, ubiquitous mobile, quantified self, cheap AI, and personal work robots. All of these were far more consequential than stand alone computation, and yet all of them were embryonic and visible when he wrote his paper. He was looking backwards instead of forward.?
Unless technical progress yields an anti-aging potion, neither Kelly nor Gordon nor I will be around to see which side of this argument comes out on top. For now, though, the burden of proof lies with the optimists. At a time when digital technology has been exalted to a position of almost religious authority, productivity growth has fallen?not just in the United States but in other advanced nations, too. In a study of twenty-one advanced countries carried out by two economists at the Chicago Fed, only one?Switzerland?enjoyed faster productivity growth between 2000 and 2010 than it had experienced between 1990 and 2000. The other twenty countries all saw productivity growth decline.
Like many other observers, myself included, the authors of this study, Jake Fabina and Mark L. J. Wright, are scratching their heads for an explanation. After running through a series of possibilities, such as measurement error (benign); cyclical factors (relatively benign); declines in the quality of education (not so benign); and the exhaustion of gains from information technology (definitely not benign); they throw their hands in the air and conclude: ?depending on the answer, slow measured productivity growth may be consistent with continued rising living standards or a period of stagnation in the developed world.? (The situation may be different in developing countries, but I haven?t seen studies demonstrating that.)
As the recovery strengthens, I would expect productivity-growth to pick up, at least moderately. But the very fact that serious economists are discussing the possibility of a period of ?stagnation? shows how much things have changed since the halcyon days of the dotcom era. As he sits in his bathtub and ponders, Alan Greenspan must be wondering what the world is coming to.
_______
* Before I am deluged with angry comments, let me recognize that in recent years the one-for-one relationship between productivity and wages, especially median wages, has broken down. But that?s a subject for another day. (For those interested, Lawrence Mishel, of the Employment Policy Institute, has an informative survey article about it.)
Illustration by Richard McGuire.
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