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A public policy blog from AEI
The Wall Street Journal has described Hal Varian as the Adam Smith of Googlenomics. As the tech giant’s chief economist, he revolutionized Google’s business strategy, and is known now as perhaps the most prominent skeptic of America’s official, sluggish productivity numbers. He joined the podcast to discuss the tech industry, the future of the economy, and much more.
JAMES PETHOKOUKIS: You are well known for arguing the official productivity numbers significantly understate the productivity gains the US is making, especially in the tech sector. If we solved the mismeasurement problem, does that get us back to the healthy productivity growth we saw before the slowdown?
HAL VARIAN: So it’s a piece of the action, but it’s not the entire action.
If you ask what’s left over, I can’t say I’m going to give you an entire solution, but I’ll give you a good place to look. A good place to look is to look at the leaders and laggards. If you look at the leading companies that are doing the best, that are the most advanced at using these new technologies, they’re doing pretty well in terms of productivity, where we think of output per worker, output per hour worked.
But then there are still a lot of laggards who aren’t really adopting the new technologies and aren’t as productive as the leading firms in their industry. And there, I think, what we rely on or we hope for is diffusion of this knowledge through the different indices, and we need to take advantage of the potential productivity gains that are there.
So we’re now in a situation in which we’re on our way, we believe and hope, to a more productive economy, but it just hasn’t sprung up everywhere.
Throughout history people have worried about technology displacing jobs, and yet the end result has always been more jobs and higher living standards. Will this time be different?
Well, everybody wants more jobs and less work. And that’s pretty much what technology has delivered. You look over the last 200 years, we had a working week of 70 hours a week a couple of hundred years ago and now we’re down to 37 in the US. We’re down to 29 hours a week in the Netherlands, a whole day less than we’re working.
So technology has delivered on that promise. We’ve got more leisure. We’ve got more time. We’re not working in dangerous, physically stressful, difficult activities to the extent that we were a couple of centuries ago. So when we look at work, we want less of it. And jobs — meaning the income-producing activity — we want more of it.
Well, I would say our challenge for the next couple of decades, because it’s pretty hard to look out much further than that, is actually the topic you raised originally, the productivity issue.
Bill Gates has talked about a robot tax, in part as a way of slowing down progress and giving workers a chance to adjust. So do we need this fast productivity growth, or is it maybe moving too fast and we have to slow it down so workers can adjust?
Well, next decade, the 2020s, we’re going to see the lowest growth in the labor force since we started measuring it at the end of World War II.
So what that means is we’ve got the population to labor force balance shifting in favor of more retired people, more non-working people and fewer working people. So how do we deal with that? That’s pretty close — the 2020s, only in a couple of years from now.
So we’ve got to really think about improving productivity now, not delaying it. Now, I grant you, if there’s some fantastic new technology that suddenly explodes and sucks a lot of jobs out of the market, that’s reason for concern. We should be aware of that possibility, but overall when you look at the next 25 years, we’re going to be facing tight labor markets. And that simply comes from looking at the demographic statistics. . . .
We’re going to have tight labor markets for the next 20 or so years. And that means we’d better get some productivity boost there or else we’re going to have problems.
Do you think the big technology firms are in any way part of the innovation problem in this country?
No. You look at these large technology companies and what critics leave out of the picture is the fact that they are competing very intensely among themselves.
Imagine a world where Apple only made devices, where Google only provided search, where Microsoft only made operating systems — that would be a very different world than what we have now because you’d have these silos that in that case, in that potential world, really were monopolizing a sector. . . .
Now, the exit question that people have raised, what you mentioned of acquisitions, well, as you know, I’m sure, that there has been a great reluctance for IPOs over the last several years. Companies want to mature much longer before they do an IPO and several of those companies would rather have an acquisition IPO. There are four times as many — four times as many — acquisitions as IPOs.
And so how could you imagine that innovation would be improved if you tried to restrict acquisitions? You see, it’s the acquisitions that are providing the payoff to the innovation investment.
When you hear the phrase pro-growth or pro-innovation policy, what do you think about?
Well, my favorite example is, of course, the internet, as you might guess. That was funded by NSF and DARPA. They also funded the Autonomous Vehicle Program; it was funded by DARPA. It was patient money in a sense that they funded five or six universities to do research on autonomous vehicles for 10 years. They’re now funding robotic surgery. There was in fact a digital libraries program. There were three search engines that came out of the digital libraries program. That was Inktomi, Lycos, and Google. So Google got its start basically from that funding for basic research.
So, from my point of view, the answer to your question is absolutely we have to keep funding basic research. China is funding basic research.
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