From the Wall Street Journal:
Contrarian economists at Google and Stanford say the U.S. doesn’t have a productivity problem, it has a measurement problem
MOUNTAIN VIEW, Calif.—Google Inc. chief economist Hal Varian is an evangelist for Silicon Valley’s contrarian take on America’s productivity slump.
Swiveling to a large screen on the desk behind him, Mr. Varian types in a search for the most commonly asked question on the subject economists elsewhere are wringing their hands over. Up pops, “What is productivity?”
See, he says, vindicated: “Most people don’t know what it even means.”
To Mr. Varian and other wealthy brains in the world’s most innovative neighborhood, productivity means giving people and companies tools to do things better and faster. By that measure, there is an explosion under way, thanks to the shiny gadgets, apps and digital geegaws spewing out of Silicon Valley.
Official U.S. figures tell a different story. 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% annual growth rate, it takes 35 years to double the standard of living; at 1%, it takes 70. Low productivity growth slows the economy and holds down wages.
The 68-year-old Mr. Varian, dressed in a purple hoodie and khaki pants, says the U.S. doesn’t have a productivity problem, it has a measurement problem, a sound bite shaping up as the gospel according to Silicon Valley.
“There is a lack of appreciation for what’s happening in Silicon Valley,” he says, “because we don’t have a good way to measure it.”
One measurement problem is that a lot of what originates here is free or nearly free. Take, for example, a recent walk Mr. Varian arranged with friends. To find each other in the sprawling park nearby, he and his pals used an app that tracked their location, allowing them to meet up quickly. The same tool can track the movement of workers in a warehouse, office or shopping mall.
“Obviously that’s a productivity enhancement,” Mr. Varian says. “But I doubt that gets measured anywhere.”
Consider the efficiency of hailing a taxi with an app on your mobile phone, or finding someone who will meet you at the airport and rent your car while you’re away, a new service in San Francisco. Add in online tools that instantly translate conversations or help locate organ donors—the list goes on and on.
Surely, Mr. Varian says, they also make the U.S. more productive.
The ‘free’ problem
But the only way goods and services move the official U.S. productivity needle is when consumers and businesses pay for them. Anything free, no matter how much it improves everyday life, isn’t included.
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. First, though, businesses must harness the innovations to the products they sell. Driverless car technology, for example, won’t hit city streets for a while.HT: Either Ritholtz@Bloomberg or YCombinator
U.S. productivity, meanwhile, has hit the skids. From 1948 to 1973, it grew at an annual average of 2.8%. The rate through the 1980s slowed to half that, even as computers spread through the economy, driving everything from welding robots in auto plants to bank ATMs.
In 1987, during the last period of productivity hand-wringing, Nobel Prize winning economist Robert Solow quipped: “You can see the computer age everywhere but in the productivity statistics.”
From 1995 to 2004, it finally looked like the digital age was paying off: Productivity growth rates closed in on post-World War II highs of near 3%. Then average gains fell to 2% from 2005 to 2009; since 2010, they have dipped below 1%....MORE