What Silicon Valley And Most People Don't Get About ProductivityCommentary by Bob McTeer
July 17, 2015
The front page of today’s Wall Street Journal features an interesting and important article titled “U.S. Productivity: Missing Or In Hiding?” It lays out Silicon Valley economists’ argument that official statistics fail to measure the positive economic impact of the latest technological innovations. The particular economist featured in the article is Hal Varian, one of the best in the business.
I agree that official measures of productivity—officially “labor productivity”—do fail to measure many innovations that make our lives easier, better, more efficient and even more productive in some commonsense meaning of the word, especially the inventions and innovations coming out of Silicon Valley. It is true that the official productivity statistics show productivity declines in the past two quarters, and that sounds much worse than it is. Those negative numbers simply reflect the fact that the index measuring output lagged the index measuring hours worked during that period. Faster output growth would be a good solution, but slower employment growth would not be good even though it would raise the number. The recent slowdown in productivity growth is really slower economic growth.
Everyman’s perception of productivity focuses on the output efficiency of individual workers. More efficient workers make for higher national productivity numbers is the commonsense view, which does not square with the official arithmetic. Back in the day, my favorite productivity example came from my cotton picking days when I was about 10 years old. I strived to pick 100 pounds a day, which, at 3 cents a pound, would net me $3.00 for the day. The adults working alongside me—the real cotton pickers—could easily pick three times as much in the same time. Their output per hour was three times mine; their “productivity” was three times greater. That’s what people understand.
Then Billy Joe Hopper—our employer—rented himself a big old mechanical cotton picker that could out pick us all. Since the mechanical cotton picker had only one driver, his measured productivity was off the charts compared to ours. He could really pick lots of cotton per hour of work. That’s the main way productivity grows in our economy—in big chunks resulting from the acquisition of labor saving technology. Note that the quantum leap in productivity probably wasn’t matched by Billy Joe’s income since the mechanical cotton picker and its skilled operator didn’t come free. I’m sure his profits went up only a bit as productivity in his cotton fields soared. But, it soared not because more cotton was picked, but because it was picked in less time.
Inventions and innovations in the industrial age drastically reduced the labor component of output and chalked up substantial productivity statistics. That isn’t necessarily true for the products of Silicon Valley even though there’s no doubt that they are making our lives easier, more efficient, and more fun. But not necessarily more productive in the traditional way we measure it.
If I were more social, I would invite friends over—preferably young friends—for an app party. Everyone would bring his favorite app and show us how it works. During the past week I got two new “free” apps that are already making my life easier. When I use them, it won’t add to GDP. Only the development of those apps did that. This may be a shortcoming in the way we measure things, but it really isn’t a legitimate criticism of productivity as traditionally defined. To do so is a bit like criticizing an orange for not being an apple or criticizing GDP for not measuring happiness.
So what about the idea that productivity has lagged during the past six months? I’m sure it has by the definition we’re stuck with. But that doesn’t mean there isn’t a lot of wonderful, life-enhancing innovations going on beyond the definition of productivity. There was productivity plus this other good stuff going on prior to six months ago and a slightly lower productivity plus the other good stuff going on in the past six months. Implicit criticism of Janet Yellen for worrying about the part that has declined, as the WSJ article does, is unfair. She knows the rest of the story as well as anybody. I’m sure she uses the delete button on her computer and doesn’t miss erasers and white out.
Is productivity higher in Silicon Valley than in the rest of the economy? I don’t know. It may take a lot of labor hours to produce apps, which determines productivity, even though the apps make the rest of the world smile without doing enhancing productivity. By making life easier, apps may actually reduce our measured productivity just like marrying your maid reduces measured GDP. Whatever its productivity, God Bless Silicon Valley.