American economy: has an era of increased productivity returned?

The last time the US economy posted surprising growth figures amid rapidly rising wages and moderating inflation, Ace of Base and All-4-One topped the Billboard charts and Overalls in jeans were in fashion.

Thirty years ago, Federal Reserve officials debated hotly whether the economy could continue to grow as vigorously without causing inflation to pick up. And in 1994, it turned out it was possible, thanks to one key ingredient: productivity.

Today, official productivity data shows a strong recovery for the first time in years. The data has been volatile since the start of the pandemic, but with the advent of new technologies like artificial intelligence and the adoption of hybrid work setups, some economists are wondering whether the recent gains could be real — and whether they can turn into lasting change. boom.

If the answer is yes, it would have huge implications for the U.S. economy. Improved productivity would mean companies could create more product per worker. And a steady recovery in productivity could allow the economy to take off in a healthy way. More productive companies are able to pay higher wages without having to raise prices or sacrifice profits.

Many of the trends in place today have parallels to what was happening in 1994 – but the differences explain why many economists are not yet ready to declare a turning point.

By the late 1980s, computers had been around for decades but had yet to generate significant productivity gains – what has become known as the productivity paradox. Economist Robert Solow said in 1987: “The computer age is visible everywhere except in productivity statistics. »

This changed in the mid-1990s, as semiconductor manufacturing improved and computers became cheaper. Businesses began to learn how to invest in information technology, which helped increase productivity.

For years, economists and analysts having questioned whether we are perhaps facing a new productivity paradox: despite our sudden access to cloud computing, fast Internet connections and mobile phones, productivity gains have been timid in the late 2000s and throughout the years 2010.

Since 2020, businesses have learned to leverage existing digital tools in new ways as employees shift to remote work. Will this lead to lasting efficiency improvements in certain sectors?

So far, whether remote work is good or bad for productivity remains a hotly debated topic. a recent article by Nicholas Bloom at Stanford and other researchers explained. Early research suggests that employees may be less effective when fully remote and that hybrid work results in little to no productivity gains.

But workers who save time on commuting and washing often feel more productive, even if that time saved isn’t reflected in official productivity data.

“Studies probably underestimate this effect,” Mr. Bloom said, explaining that employees who are happier because of job flexibility may be less likely to quit, which helps companies avoid a unproductive reconversion. Remote work could also allow companies to move more “tedious” jobs overseas, he thinks, pushing Americans toward more dynamic work.

“The overall story is potentially quite powerful,” he said in an interview, predicting that remote work is halfway to unleashing a decade-long productivity boom. “We are in a new world: it will take years. »

In the 1990s, use of the World Wide Web began to become widespread. Businesses were initially concerned that it could turn away their workers. (“Oh, what a tangled web this Internet is,” sighed a 1995 New York Times article about online distractions.) But the tools ultimately streamlined many kinds of work.

A retrospective During the boom of the 1990s, it was found that the combination of efficient computer manufacturing and increased use of information technology accounted for about two-thirds of the productivity increase of the time .

Today’s equivalent of new technology is artificial intelligence. While many economists say it’s probably too early to see the full benefits of AI, some advocates believe it could prove transformative by automating mental tasks, including proposal writing and emailing. .

“There’s a lot more to come as more and more people adopt these things,” said Erik Brynjolfsson, an economist at Stanford who is optimistic that we could be on the cusp of a takeoff of productivity as white-collar workers gain their daily capabilities. enriched by new tools. He ran experiences and discover that AI helps workers and has co-founded a company which supports companies on the best way to use technology.

But Robert Gordon, a leading productivity-focused economist at Northwestern University, is skeptical. He said that unlike the computer age and early internet era, the biggest impacts of AI could be in office work – while computer manufacturing has also become more efficient in the 1990s, enabling gains in several sectors.

“I don’t see the universality of AI spreading across the economy with this multi-industry impact,” Mr. Gordon said.

Another driver of the productivity boom of the 1990s? Companies were making big logistical improvements. Walmart has grown rapidly over the decade, bringing with it strong supply chain management that allowed it to efficiently stock shelves with inexpensive products from around the world. The manufacturing industry, particularly in the pharmaceutical sector, has also improved.

One possible challenge is that it is difficult to achieve such gains twice: now that companies have become more efficient, it may be difficult for them to improve drastically. Online shopping continued to revolutionize retail in the 2010s, for example, but both industry and in general productivity gains have been modest.

This highlights an important point about productivity growth. It’s easy to choose simple solutions, like optimizing supply chains using software. Once this is done, it may become more difficult to make gains. The economy ends up with higher levels of productivity, but not necessarily high and sustained productivity growth.

What can lead to lasting productivity gains is an explosion of innovation that feeds on itself – making the recent rise in business creation a sign of hope. New businesses are often more inventive.

In 1994, many companies were created as people tried to capitalize on technological advances. Today, business applications have increased againlikely the result of people deciding to strike out on their own after losing or leaving their jobs amid the pandemic.

The new uptick in business could simply reflect people shifting to working from home, recent search suggested Fed economist Ryan Decker and John Haltiwanger of the University of Maryland. But many of these new companies operate in areas that can boost productivity, including online retail, software publishing, computer systems design and research and development services.

The 1990s and 2020s have another productivity-boosting potential in common: the decline in pricing power.

Inflation had has been cooling for years In the mid-1990s, Fed officials noted in their meetings that companies were losing their ability to continue raising prices without losing customers. To keep their profits from collapsing, companies have had to find ways to be more efficient.

“We will necessarily tend to get an increase in productivity because it will be imposed on the system,” said Alan Greenspan, then chairman of the Fed. theorized at a Fed meeting.

Inflation is also falling today. And the job market was strong then and still is today – meaning businesses had to pay to attract workers. When wages rise faster than prices, companies must put more strain on their workers if they hope to maintain profits.

By 1996, Mr. Greenspan was convinced that productivity was rising. So he persuaded his colleagues that there was no need to try to slow the economy that much. As productivity improved, high growth was less likely to cause inflation.

Jerome H. Powell, the current chairman of the Fed, praised the work of Mr. Greenspan “courage” and foresight going through this period.

Perhaps that’s a lesson he can build on in the months to come. Growth remains stronger than Fed officials expected, and policymakers will have to decide whether to respond by keeping interest rates higher for longer.

For now, Mr. Powell is not convinced that America is in a new productivity boom. “I guess we could shake ourselves off and get back to where we were,” he said at a Jan. 31 news conference.

But, he admitted, “I don’t know.”

In the 1990s, it wasn’t until 1999 that economists truly believed that productivity had taken off, noted John Fernald, an economist at INSEAD Business School. So while hope shines now, confidence may be years away.