The American Economy: Has the Age of Increased Productivity Returned?

The last time the U.S. economy posted surprising economic growth numbers amid rapid wage gains and moderate inflation, Ace of Base and All-4-One topped the Billboard charts and denim was trending.

Thirty years ago, officials at the Federal Reserve were hotly debating whether the economy could keep moving strongly without stimulating higher inflation. Back in 1994, it turned out that this was possible, thanks to one key ingredient: productivity.

Now, official productivity data shows a significant rebound for the first time in years. The data has been volatile since the start of the pandemic, but with the dawn of new technologies like artificial intelligence and the embrace of hybrid work setups, some economists are questioning whether the recent gains might be real — and whether it could turn into a permanent bubble economy.

If the answer is yes, this will have huge implications for the US economy. Improving productivity means that companies are able to produce more products per worker. A steady rise in productivity could allow the economy to get off to a healthy start. More productive companies are able to pay better wages without having to raise prices or sacrifice profits.

Many of today's trends have similarities to what was happening in 1994 — but the differences explain why many economists aren't ready to declare a turning point just yet.

Computer Age vs. Zoom Age

By the end of the 1980s, computers had been around for decades, but had yet to achieve significant gains in productivity—what became known as the productivity paradox. In 1987, economist Robert Solow said: “You can see the computer age everywhere except in productivity statistics.”

This changed by the mid-1990s, as semiconductor manufacturing improved and computers became cheaper. Companies began to learn how to invest in information technology, and this helped productivity boom.

For many years, economists and analysts He doubted Whether we're facing a new productivity paradox: Despite our sudden access to cloud computing, fast Internet connections and mobile phones, productivity gains were tepid in the late 2000s and throughout the 2010s.

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

Even now, the topic of whether remote work is good or bad for productivity is still hotly debated, as it is in many other countries. Recent paper Nicholas Bloom at Stanford University and other researchers explained. Early research suggests that employees may be less efficient when fully remote, and that hybrid working leads to small, if any, productivity gains.

But workers who save commuting and care time often feel more productive — even if that saved time isn't captured in official productivity data.

“Studies may underestimate the effect of this,” Bloom said, explaining that employees who are happier with job flexibility may be less likely to quit, helping companies avoid unproductive retraining. He believes remote work could allow companies to move more “boring” jobs overseas, pushing Americans toward more dynamic work.

“The overall story is probably going to be very strong,” he said in an interview, predicting that remote work will be halfway through unleashing a decade-long productivity boom. “We are in a brave new world: it will take years.”

Internet vs. artificial intelligence

In the 1990s, the World Wide Web began to be widely used. Companies were initially concerned that this would distract their workers from work. (“What a tangled web this Internet is,” sighed a 1995 New York Times article about online distractions). But the tools eventually simplified many types of work.

One Retroactively A recent study of the 1990s boom found that the combination of efficient computer manufacturing and increased use of information technology accounted for about two-thirds of the productivity increase in that era.

Today's equivalent of shiny new technology is artificial intelligence. While many economists have said it may be too early to see the benefits of AI play out in full force, some proponents believe it could be transformative by automating mental tasks including writing proposals and emails.

“There's a lot to come as more people adopt these things,” said Erik Brynjolfsson, an economist at Stanford University, who is optimistic that we may be on the cusp of a productivity breakthrough as white-collar workers enjoy their day-to-day capabilities. Enhanced with new tools. He was running Experiences And we discovered that AI actually helps workers, and it does Co-founded a company Which trains companies on how to better employ technology.

But Robert Gordon, a leading economist who focuses on productivity at Northwestern University, is skeptical. He said that in contrast to the computer and early Internet era, AI's greatest impacts may be in office work — while computer manufacturing also became more efficient in the 1990s, allowing gains across several sectors.

“I don't see the universality of AI sweeping across the economy with this impact on multiple industries,” Mr. Gordon said.

Walmart vs online shopping

Is it another driver of the productivity boom of the 1990s? Companies were making significant logistical improvements. Walmart grew rapidly During this decade, it brought with it strong supply chain management that allowed it to efficiently stock shelves with inexpensive products from around the world. Distribution in particular In pharmaceutical preparationsAlso improved.

One potential challenge is that such gains are twice as difficult to achieve: Now that companies are more efficient, it may be harder for them to improve radically. Online shopping continued to revolutionize retail in the 2000s, for example, but both Industry in general Productivity gains were modest.

This underscores an important point about productivity growth. It's easy to pick the low-hanging fruit, such as optimizing supply chains with software. Once this is done, it may become difficult to make gains. The economy ends up with higher productivity levels, but not necessarily sustainable high productivity growth.

Entrepreneurship flourishes

What can lead to lasting productivity gains is a wave of innovation that feeds on itself – making the recent rise in business formation a hopeful sign. New companies are often more innovative.

In 1994, a lot of companies were created when people tried to take advantage of breakthroughs in information technology. Today, business applications have It's been rising againThis may be a result of people deciding to go on strike on their own after losing or leaving their jobs amid the pandemic.

The new business boom could simply reflect that people were redeploying to working at home, Recent research It was suggested by Fed economist Ryan Decker and John Haltiwanger of the University of Maryland. But many of the new companies are operating in areas likely to stimulate productivity, including online retail, software publishing, computer systems design, and research and development services.

Two inflation falls

The 1990s and 2020s share another potential productivity booster: declining pricing power.

It was inflation Been cooling for years By the mid-1990s, Fed officials noted at their meetings that companies were losing their ability to continue raising rates without losing customers. To prevent their profits from collapsing, companies had to figure out how to be more efficient.

“Inevitably we will tend to have increased productivity because it is imposed on the system,” Alan Greenspan, then Fed chairman, said. It was theorized during one of the Federal Reserve meetings.

Inflation is also falling today. The labor market was strong then and is strong now, meaning companies had to pay large sums to attract workers. When wages rise faster than prices, companies must overwork their workers if they hope to maintain their profits.

Alan Greenspan vs. Jerome Powell

By 1996, Greenspan became convinced that productivity was rising, so he convinced his colleagues that they did not need to try to slow the economy that much. As productivity improves, strong growth is less likely to cause inflation.

Jerome Powell, the current Chairman of the Federal Reserve, praised Greenspan's policy “Fortitude” and insight On the move during that period.

This may be a lesson he can learn from in the coming months. Growth remains stronger than Fed officials expected, and policymakers will have to decide whether to react by keeping interest rates higher for longer.

For now, Mr. Powell is not convinced that America is witnessing a new productivity boom. “I think we might get out of there and go back to where we were,” he said during a press conference on January 31.

But he admitted, “I don't know.”

In the 1990s, it took until 1999 before economists really believed productivity had taken off, noted John Fernald, an economist at INSEAD business school. So while hope sparkles now, confidence may be years away.