NCPA - National Center for Policy Analysis

Silicon Valley Doesn't Believe U.S. Productivity is Down

July 22, 2015

For a decade, economic output per hour worked -- the federal government's formula for productivity -- has barely budged. Over the past two quarters, in fact, it has fallen. Sluggish productivity is raising alarms all the way to Federal Reserve Chairwoman Janet Yellen.

Productivity matters, economists point out, because at a 2 percent annual growth rate, it takes 35 years to double the standard of living; at 1 percent, it takes 70. Low productivity growth slows the economy and holds down wages.

From 1995 to 2004, due to the internet revolution, productivity growth rates closed in on post-World War II highs of near 3 percent. Then average gains fell to 2 percent from 2005 to 2009; since 2010, they have dipped below 1 percent.

Hal Varian, a Google economist, says the U.S. doesn't have a productivity problem, it has a measurement problem.

  • Productivity growth estimates do not consider "free" productivity increases, like the ability to hail a cab using an app on your mobile phone or translating a foreign language online for personal use.
  • Many in Silicon Valley say it is just a matter of time before new innovations surface in salable products and goose the official productivity tally.
  • GDP is still measured using a system based on 1930's products. It is not well suited to capture the products of a digital age.

There is also a time problem:

  • The economy needs time to make use of new capabilities before they show up in productivity numbers.
  • Time saving technologies like internet searches are predicted by Varian to cause a new wave of productivity explosion.
  • Businesses are taking longer to invest in new equipment due to the after effects of the great recession.

Source: Timothy Aeppel, "Silicon Valley Doesn't Believe U.S. Productivity is Down," The Wall Street Journal, July 16, 2015.


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