Fed Experts Deliver the Bad News: Productivity Slump Is for Real

UBS’s Matus Says Fed Will ‘Take Cowards Way Out’
  • Slowdown means 2015 GDP was $3 trillion lower than otherwise
  • Smaller efficiency gains not a mirage of mis-measurement

It’s a paradox that’s been puzzling economists for a while. How can U.S. productivity growth be slowing down at the same time that innovation in everything from smartphones to 3D printing seems to be speeding up?

A trio of economists from the Federal Reserve and the International Monetary Fund think they have the answer and it’s not particularly pretty. They argue in a new paper that the down-shift in productivity is for real. It’s not a mirage of mis-measurement by government statisticians unable to keep up with rapidly changing technology.

To show how important that conclusion is, the paper’s authors cite one telling statistic. U.S. gross domestic product would have been about $3 trillion higher in real, inflation-adjusted terms in 2015 if productivity hadn’t slowed over the last decade.

It’s not that the researchers give the federal bean counters a pass and say they’re now accurately toting up every bit of the economy. It’s just that the measurement problems have been around a while and aren’t new.

So they can’t explain why efficiency gains have slackened in the past 10 years from the previous decade, when statisticians also had trouble gauging the economic benefits of information technology.

Marked Decline

In fact, after making adjustments in the government data for computers, software and intangibles like research and development, the economists find that the down-shift of the last decade was even more marked than in the official data.

The authors -- David Byrne from the Fed in Washington, John Fernald from the San Francisco Fed and Marshall Reinsdorf from the International Monetary Fund -- also don’t deny that IT has made Americans’ lives easier and more enjoyable in many ways, from calling up directions on Google Maps to trading cat videos on Facebook.

But that doesn’t translate into more economic output. The researchers compare such online services to an old economy innovation: television. It too enhanced Americans’ leisure time but didn’t make them more productive.

New Normal

So if it’s not measurement problems, what is behind the startlingly slowdown in productivity in the past 10 years? In the paper they will present at the Brookings Institution in Washington on March 10, the authors suggest that it’s just a return to normal.

It’s the previous 1995 to 2004 period that was exceptional, as the adoption of information technology transformed the way many companies operated.

“Looking forward, we could get another wave of the IT revolution,” they wrote, adding more ominously, “since the early 1970s, modest and incremental productivity growth has more often been the norm.”

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