The GDP/Productivity Paradox -- Real?... or Off the Mark?

The GDP Paradox -- 
Real?... Or Off The Mark?

Economics Without The B.S.**: 

[**  Double entendre intended.]

Our rate of productivity growth, as measured by GDP, has been on a declining trendline since the 1960s, our best peacetime economic growth in our 200+ years of history.  And it has gotten worse since 2000, during our information technology age.  Some of our "experts" say we do not have a productivity growth problem but a measurement problem by relying on GDP, an indiciator left over from our industrial economy age when we are now in a new information technology age.

I disagree that the GDP paradox is a measurement problem.  I am not denying that there is a measurement issue, just that it is a side issue to the overall problem of lackluster productivity gains.  I would normally make an argument that in addition to the GDP rate of increase showing a negatively sloping trendline over the past several decades, you also have downward sloping trendlines for expansion of industrial capacity, investment in plant & equipment, R&D, education, labor productivity, multifactor productivity, all in declining trendlines for a number of years, even before the Great Recession.  I thought Hal Varian had good explanations for why these trends exist, and not denying that they were trends, and added interesting comments about capital formation for the newer technologies versus more traditional enterprises.  So let me skip those issues.

I also thought Hal Varian had a good discussion of the diffusion problem – with the diffusion of the technology advantage only slowly rippling its way through our economy, although Varian sees this improving as we go further.  An excellent point was made about optimizing the use of the newer technologies, “we have to figure out a way to get the BEST use of it”; with a mention about Gordon's thinking we have reached a point where we will no longer get a productivity bump out of the information technology.  Varian’s reply that we are not there yet and what we have is “failure of imagination” I thought was right on the mark.  This diffusion problem shows up not just in a sector analysis of our economy, but you can also see it geographically played out with only a few metro areas (usually around 25 out of almost 400 metro areas nationally) that have high GDP productivity (about half of the nation’s GDP) while much of the rest of the nation suffers from below average GDP performance.  And my point regarding diffusion would be here is a technology, information technology, that lends itself to being geographically distributed (especially since much of it is centered in the service sector), in contrast with the manufacturing environment (with hubs and long logistic supply chains) and yet we see info tech centers of excellence highly concentrated in just a few geographic areas around the country.  And we are a nation with educational resources spread out around the countryside, to include rural areas, so you just must wonder if we are taking full advantage of the resources we have to dedicate to the issue and get everyone up to speed.

But let’s take on the GDP measurement problem more indirectly.  Let’s use measurements not affected by all this other nonsense of what gets measured and what doesn’t.  If we are doing so good today with productivity because of the free resources that liberate prior cost restraints and result in newborn efficiencies from the phantom productivity, WHERE ARE THE JOBS?  The 10 years of the 1960s with annual rates of real GDP growth that are almost 3x greater than the past 17 years and a workforce that was less than half what ours is, produced (had a net gain: jobs added minus jobs lost) over 17 million jobs – the 17 years of Bush/Obama/and 11 months of Trump have a net gain of less than 15 million; even if you add the 6 million job openings that only gets you to a little over 20 million, still not a good comparison with the ‘60s with half the workforce.  Take 1965 with a workforce of approximately 75 million, it produced more jobs than 2016 with a workforce of almost 160 million (2.9 million vs 2.2 million); and it is likely that 2016 will be better than 2017.  And I use 1965 because that is before the Vietnam buildup influences the economy.

This is the creative/destruction argument of the impact of technological innovation in a nutshell.  The 1960s were just as dynamic as what we have been going through in the last 25 years.  In the 1960s we had the destruction, but we also had the creation; and, a long sustained booming economy with the productivity gains widely shared in society.  In the last 25 years we have had the destruction, but only a tepid creative recovery; and, the productivity gains have resulted in a maldistribution of wealth with increased inequality in comparison to the ‘60s.  The job creation has been a lot weaker and as Varian has said we need the job creation and productivity boost to overcome the looming demographic shift.   If we are losing the dynamism in our society that makes for that creative/destructive energy that propels economic growth, is there an opportunity for public policy remediation?  Perhaps we can get back to using fiscal policy more aggressively like we did in the 1960s.

Getting the nation’s productivity picture is important for maintaining and improving our standard of living as we go on – human progress is linked with economic development and democratic societies function best when that progress is broadly shared.  So, by raising the GDP measurement issue for keeping track of our progress is either a distraction or a key indicator for consideration.  Once again, I think while it is an issue, it is a side issue to the overall problem of lackluster productivity gains and the long trendline of contractionary economic policies that have resulted in the United States emphasizing consumption over savings and investment that have affected our international trade imbalances as well as our continuous grand fiscal deficits.