Back to basics

Shutterstock.com

Article Highlights

  • Why has growth been so slow after the Great recession?

    Tweet This

  • [CHART] - Are computers to blame for the growth slowdown in the US?

    Tweet This

  • Is slow growth the new normal after computers?

    Tweet This

This article appears in the July 21, 2014 issue of National Review.

In the aftermath of the Great Recession, observers have searched for a cause for the persistent limping pace of economic growth. Demand-side theories have formed the basis of the common assertion that the lingering effects of the financial crisis are to blame for our slow growth, but a striking new paper argues that another culprit may be to blame: the computer.

It’s not that computers are bad, of course, but that the impact of the computer on growth appears to have been much less impressive than expected. Economists thought the computer’s impact on the economy would have three main stages. For illustrative purposes, imagine a machinetool shop. In the pre-computer stage, a customer might ask the shop to make a part for an engine. The shop owner would dig through manuals, find the specifications of the part, and then use his machine tools to craft it. When the computer arrived, the manuals could be organized on a computer—the first stage. Instead of spending time digging through manuals, the owner could pull the specifications up right away, significantly increasing the number of parts he could craft in a day—the second stage. And the final stage has been reached today: The computer not only knows the specifications, but runs the machines as well.

Economists expected the growth effects from this multistage process to be great, and enduring. But the new paper, by John Fernald and the San Francisco Fed, suggests a dramatically different picture. The economy received a huge jolt from computers between 1995 and 2003, owing to large improvements in technology that accompanied the widespread introduction of computers—but the jolt tapered off suddenly, so much so that a decline in the growth rate of productivity is visible even before the financial crisis.

Growth can come to an economy if its workers become more talented (“labor quality”), if it accumulates capital that can then be used to increase production by its workers (“capital deepening”), or if it experiences technological progress that makes it capable of using its capital and labor more efficiently (which appears as growth in “total-factor productivity”). The nearby chart shows Fernald’s estimates of how these three factors have contributed to growth in labor productivity in the United States.

It is apparent in the chart that there have been two periods of extremely heightened technological progress in the U.S.—between 1948 and 1973, and between 1995 and 2003. This most recent boost was largely due to a boom in information technologies, in both the industries that produce them and those that use them. The slowdown of productivity improvements in these sectors is a large force behind the decrease in productivity growth in the economy that preceded the Great Recession. Fernald documents that the industries that sped up the most slowed down the most, and that there was no geographic variation in the slowdown that might have been related to the real-estate crash or other cyclical factors. Thus, technology must be the culprit.

With the productivity boom behind us, truly healthy growth will have to come from policies that drive capital and labor inputs higher. A corporate tax cut, for example, could well induce a machine shop to purchase a large number of new computer-driven machines. If it did, output would go up, even if tomorrow’s machines were no more productive than today’s.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Event Registration is Closed
Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Event Registration is Closed
Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.