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The coming productivity boom: A short-read Q&A with Bret Swanson
The US economy’s 2% GDP growth over the past several years falls well short of the 3.5% it averaged from World War II to the Great Recession. Why is the American economy apparently not as productive as it used to be? Are we somehow less innovative than we were 50 years ago? To help answer those questions and others, I spoke with Bret Swanson, an AEI visiting fellow and president of Entropy Economics. You can listen to our conversation at Ricochet, or read the full transcript here.
PETHOKOUKIS: Let’s start by taking a look at a new analysis you have, co-written with economist Michael Mandel. It’s called “The Coming Productivity Boom: Transforming the Physical Economy with Information.” You posit that the decade-long productivity drought is almost over, as the information revolution will transform the traditional physical industries. But tech innovation is one thing, translating that into rising living standards is another. So tell me what your thesis means for economic growth and jobs.
SWANSON: We’ve been hearing over the last decade or so — and even moreso over the last year — a fairly pessimistic case: that innovation is over, that IT was great but it really wasn’t applying to the whole economy the way, say, electrification was 100 years ago, and that we’re running out of ideas and we should lower our expectations for the next decade or two for innovation and growth. And so what we did was try to figure out the sources of slow growth — and a lot of smart people have looked at this and there are a lot of interesting reasons for it, or hypotheses at least. Then we looked forward to say, “Is it true that we’ve run out of ideas? And should we expect no more than 2% economic growth in the coming years?” This is a central question for economics, investors, public policy, and, of course, for citizens, who are living in this economy.
We think there’s real reason to believe that we are on the verge of a new productivity boom. And if some of the industries that have not so far exhibited fast productivity growth — like some of the digital industries have — if those start applying technology in innovative ways, we think we could see economic growth closer to 3% over the next 10 to 20 years. That of course is an estimate, but we try to give a lot of evidence over how this might come about.
So we have one sector in the economy where there’s a lot of innovation and a lot of technological progress. Why isn’t that spreading into the non-digital economy?
There are a number of reasons. If you think about it, when computers and then the internet came along, the most obvious applications of these information based technologies would be industries that are already information based — news, media, finance. These are already numbers-based, data-based industries. If you apply internet and computers to those, which we’ve done for the last 20–30 years, those were obvious applications and we found ways to do this. These industries have been transformed — Netflix transforming movies and TV, or whether it’s electronic stock markets and exchange traded funds transforming finance, or whether it’s the work a lot of professional services do, which they can do mostly through computers. It’s the other industries that are much more physical by nature — whether it’s people working with people, people working with objects, transportation, health care, etc. — that, like you said, takes longer to figure out how to apply information technology to these industries in innovative ways. So that’s one thing. I think we’re on the cusp of learning how to do that.
But the other very significant factor is that compared to tech, internet, or mobile content, it also happens that a lot of these physical industries — health care, transportation, education, manufacturing, energy — are much more highly regulated than the tech world, which operates with a relatively free hand. You might see lower rates of investment, lower rates of entrepreneurship, less disruptive innovation from upstarts experimenting with new business models, simply because they’re either not able to or the cost is higher. You probably also see a lower rate of innovation from even the incumbents. Information technology: yes, it can make existing processes more efficient, but as we’ve seen in tech and digital industries, it’s also an amazing platform to unleash unpredictable explosions of further entrepreneurial activity. That’s what we’ve seen so much in tech. The web unleashed waves of entrepreneurship; the iPhone unleashed waves of entrepreneurship with apps and so forth. We just don’t see that as much in health care, manufacturing, transportation, etc.
The web unleashed waves of entrepreneurship; the iPhone unleashed waves of entrepreneurship with apps and so forth. We just don’t see that as much in health care, manufacturing, transportation, etc.
From a public policy standpoint, is policy creating any barriers preventing the diffusion of these new technologies to other industries?
Yeah, I think so. I think that the way we regulate a lot of these industries and the structure of industries apart from mere regulation — especially in health care. The fact so much of the industry is third party payer, whether that’s through Medicare/Medicaid or whether that’s through private insurance, doesn’t allow us to have a dynamic, entrepreneurial market, where people are trying to innovate, reduce costs, and improve service. You have this relatively stagnant industry that doesn’t operate like other industries, so I think freeing health care . . . I think Washington right now isn’t thinking nearly big enough on health care and medicine, and I understand it’s a complicated subject and I understand the complexities of the politics of it, but they view it as a stagnant industry. Even on their best days, they think of bending the cost curve downward, and I think about it as in: Why don’t we unleash people to create hundreds or thousands of new cost curves? You know, like the radical downward sloping cost curves of some of the digital industries. And that’s what we need to really make a profound change in health care, where we’re delivering amazing new services and therapies to patient-consumers at far, far, far lower prices with all sorts of financial and insurance options for people.
In my view, we should unleash health care to be radically more innovative, but at the same time, we can solve some of these issues about helping take care of people who have preexisting conditions, for whom health care is too expensive.
The break up big tech movement — what is your take on that?
It’s interesting. Anytime we see firms that are especially innovative and successful and they tend to grow as a result of that, they grow large, we get worried. And again, it’s one of these paradoxes of economic analysis: we’re worried when firms and industries aren’t doing well, but we get really worried when they are doing well. My overall view is this sector of the economy has delivered huge amounts of innovation and new products and services at rapidly falling prices and has helped us change the world beyond economics, but in culture and so forth. Overall, it’s been a very positive thing.
But should we be concerned with the fact that data is so important, and they have a lot of data? Are these companies suppressing innovation?
Well, two things: One, we also thought that about IBM in 1980, and we thought that about Microsoft in 1997 and those examples at least were solved by, like you said before, innovation moving beyond the policy argument. But I will say this: my view is that big companies, as great as they are, don’t do themselves any favors by coming to Washington and asking some of their competitors and rivals to be more highly regulated. I’m talking about the example of net neutrality for the last 15 years. A lot of Silicon Valley companies have come to Washington and asked for intrusive regulation of our communications networks, and it’s become a real policy war. One, I don’t think it’s good for these companies. I think more bandwidth, more investment in communications networks is only good for these companies, who need more bandwidth to deliver new content, new services, etc.
On the other hand, it leaves them vulnerable to these charges that you bring up — they’re too big, they need to be regulated, we should be scared of them. And so I think they’re shortsighted in their push for Title II regulation of the internet; it leaves them no leg to stand on when they say, “listen, we’re innovative, we’re investing, we’re creating great products; let’s keep doing that.” It doesn’t make them friends on the left and increasingly on the right, where we’re seeing a populist wave of anti-big sentiment. And so for lots of us who think that a free and open tech economy is important to the overall economy, it’s going to make it much more difficult to defend them if they’re arguing for regulations on others.