Productivity: Where Have We Been? Where Are We Going?

Productivity: Where Have We Been? Where Are We Going? Dan Sichel Wellesley College October 26, 2018 Presented at the 8th Annual NBP CoFEE Mystery of Low Productivity Growth in Europe Warsaw, Poland

Setting the stage • Problem • Causes • Future • Reasons for cautious optimism • Policy

The Problem • After years of poor performance, what is the new normal for productivity growth?

EU Labor productivity growth: slowing trend since 1960 EU Source: Bergeud, Cette, Lecat (2015)

Same for total factor productivity growth EU Source: Bergeud, Cette, Lecat (2015)

CEE as well: TFP growth has slowed since2007 Average Percent Growth Source: Levenko, Oja, and Staehr, “Total Factor Productivity Growth in Central And Eastern Europe Before, During and After the Global Financial Crisis,” Eesti Pank, working paper, 8/2017.

What caused the slowdowns? • A proliferation of stories • Supply side • Demand side • Mismeasurement

Mismeasurement? • Mismeasurement generally not good explanation for productivity slowdown • Need jump in bias right at time of slowdown • Evidence for U.S. suggests not the case • Byrne, Fernald, & Reinsdorf • Syverson • Slowdown is real!

But, measurement matters! • Need better measures for digital economy, intangibles, and innovative activity: • High-tech products (Byrne & Corrado and Byrne, Oliner, & Sichel) • Intangible capital • Health care • Cloud computing services • And so on! • Need to understand relationship between GDP and social welfare

Supply side Explanations • Fading effect of digital technology • Gordon, Fernald • Unimpressive innovation compared to past • Gordon • Laggard firms falling behind superstar firms • Andrews, Criscuolo, & Gal (OECD) • Gorodnichenko, Revoltella, Svejnar, & Weiss (2018) • Less competition • CEA, Gutierrez and Philippon • Slowing gains in education • Slowdown in rates of convergence

Demand Side • Secular stagnation • Summers • Weak demand leading to weak supply • Especially relevant for countries where capital investment has been weak • Reifschneider, Wascher, & Wilcox (2013) • McKinsey (2018)

No Single Slowdown Story • Some evidence supports each story on supply-side and demand-side. • Different explanations across countries. • May never know! Still do not have complete explanation of 1970s slowdown.

Prevalence Across Countries is Striking • Suggests common cause • One plausible story: • Technology in mid-2000s. • Other factors after GFC

Future: Is slowthe new normal? • A Key issue: Future diffusion and development of technology • If bright, better times ahead • Branstetter & Sichel (2017) • If sluggish, disappointment all around • Gordon (2016)

Ingredients for Revival: Casual empiricism Rapid change • Artificial intelligence • Autonomous vehicles • Cloud computing • New platforms (Uber, Airbnb) • Advanced robotics • 3-D printing (the end of inventory!)

Promising, but long lags between innovation and productivity • Electricity • Key technologies in place by 1890. • 25-year lag for aggregate productivity • Computers • Commercialized in 1950s • Mid-1990s productivity resurgence. • Current era of digital innovation Ingredients in place for revival!

What should policy do? • The obvious for economists • Maintain stable economic environment with high levels of competition • Facilitate diffusion and development of technology and education

But, none of this is easy • Policy can go in the wrong direction • Technology and creative destruction creates losers • Broad political support for growth policies requires supporting losers

Three Questions • What caused the slowdowns? • More than one explanation! • May never know! • Is slow the new normal? • Does not have to be • Ingredients in place for revival • What can policy do? • Maintain stable environment • Avoid mistakes • Key: future path of technology

In contrast to our friend below, today’s program looking in the right place. Source: Honore Daumier

Productivity: Where Have We Been? Where Are We Going?