Fernald, Thipphavong, and Trehan: Will Fast Productivity Growth Persist?
John Fernald, David Thipphavong, and Bharat Trehan of the San Francisco Fed ask if the downward shift in productivity growth since mid-2004 is temporary or permanent. They say that it's temporary:
Economist's View: FRBSF: Will Fast Productivity Growth Persist?: Is the era of rapid productivity growth over?
To begin to answer this question, it is useful to look first at whether the pace of innovation in the ICT sector has slowed.... Other things remaining the same, the faster the rate of technical progress in the ICT sector, the faster the rate at which the price of ICT goods falls against other prices in the economy.... [T]he price of information processing equipment and software.... fell at close to a 6-1/2% rate over the 1973:Q1-1995:Q3 period; the rate of decline accelerated to 8-3/4% over the 1995:Q4-2000:Q4 period but has fallen back to 6% since. Based on this evidence... one could argue that the pace of technical progress in the ICT sector has slowed....
If the productivity slowdown in ICT production is permanent, should we then expect productivity growth in the ICT-using sectors to fall back to the rates seen before the boom? The GPT literature suggests that the answer is no. DeLong (2002) points out that, even though the period of double-digit annual productivity increases in steam-power and textile-spinning machinery ended in the early 1820s, these technologies made their major contribution to economic growth in Great Britain in the subsequent 50 years. Similarly, David (1991) emphasizes that the benefits of the electric motor took nearly half a century to spread, as firms learned how to make more efficient use of the technology.
Is ICT likely to have the same impact that earlier GPTs did? At least one metric suggests that it could. It has been pointed out that ICT prices have fallen far more dramatically than prices of GPTs like electricity and the internal combustion engine, and the resulting decline in the price of capital goods is unprecedented. This suggests that we might expect productivity growth to remain elevated for a while yet.
Furthermore, recent data for nonfinancial corporations suggest that productivity growth might not have slowed quite as much as the nonfarm business sector data indicate.... [P]roductivity growth in nonfinancial corporations has tended to track that in the overall nonfarm sector reasonably well, but the former has not slowed as much over the past year.... The reasons for the divergence are not clear. The underlying source data are different, since nonfinancial corporate output is measured from data on income, whereas nonfarm output is measured from data on expenditure. While the national accounts are designed so that, in principle, income and expenditure necessarily grow at the same rate, the two measures rely on different surveys, so there can be a "statistical discrepancy" between them.
At the peak of the "New Economy" hype of the late 1990s, many claimed, "The Internet changes everything," and, by implication, that it happened overnight. But the history lessons from GPTs, like electricity and steam power... suggest that the necessary complementary investments and innovations that drive change unfold only slowly over time.... To the extent that ICT is, indeed, a GPT on a par with the electric dynamo, the returns to innovation (whether managerial innovations or the development of new products and processes) might remain high for some time to come. The strength of productivity growth in nonfinancial corporations provides another reason for hope that underlying productivity trends remain strong.
None of this is meant to argue that trend productivity growth will revert to the 3% rate seen around the turn of this century; we are arguing instead that--in the near term--trend productivity growth is unlikely to revert to the rates seen during the 1970s or 1980s. But these are not statements that can be made with a high degree of certainty. As we confessed at the outset, economists, including us, do not have a winning record in predicting the path of productivity growth...
J. Bradford DeLong (2002), "Productivity Growth in the 2000s was damned good for a paper that gives both a number and a date, if I do say so myself.
