Is America’s 10-year productivity drought almost over?

The above chart is an ugly one, at least if you care about rising living standards. The observed productivity decline has helped drive the idea that the US and other advanced economies are stuck in a “great stagnation.”

Overall, as Goldman Sachs has noted, labor productivity in rich nations “has grown at an average pace of just ¾% since 2008, down from 2% in the three decades before.”

And in the US specifically, notes IHS Markit, average annual productivity growth since 2010 slipped to 0.5% vs. 2.3% over the 1947‒2010 period.

Hopefully, the techno-pessimists are wrong and the decline doesn’t reflect a new normal in the pace of innovation and capital accumulation. In that world, we’ve squeezed all we can out of the IT revolution.

A more optimistic story, one supported by Goldman, is that the decline is due to “temporary hangover effects from the financial crisis, increased measurement error in a more rapidly changing economy, or both.”

And if you are looking to side with the techno-optimists, check out this new analysis from AEI Visiting Fellow Bret Swanson and economist Michael Mandel of the Progressive Policy Institute, commissioned by the Technology CEO Council. From “The Coming Productivity Boom” (which features that chart,) a report that tries to quantify the deep economic impact of  “software eats the world” thesis:

 The 10-year productivity drought is almost over. The next waves of the information revolution—where we connect the physical world and infuse it with intelligence—are beginning to emerge. Increased use of mobile technologies, cloud services, artificial intelligence, big data, inexpensive and ubiquitous sensors, computer vision, virtual reality, robotics, 3D additive manufacturing, and a new generation of 5G wireless are on the verge of transforming the traditional physical industries—healthcare, transportation, energy, education, manufacturing, agriculture, retail, and urban travel services. . . . Healthcare, energy, and transportation, for example, are evolving into information industries. Smartphones and wearable devices will make healthcare delivery and data collection more effective and personal, while computational bioscience and customized molecular medicine will radically improve drug discovery and effectiveness. Artificial intelligence will assist doctors, and robots will increasingly be used for surgery and eldercare. The boom in American shale petroleum is largely an information technology phenomenon, and it’s just the beginning. Autonomous vehicles and smart traffic systems, meanwhile, will radically improve personal, public, and freight transportation in terms of both efficiency and safety, but they also will create new platforms upon which entirely new economic goods can be created. . . . How much could these IT-related investments add to economic growth? Our assessment, based on an analysis of recent history, suggests this transformation could boost annual economic growth by 0.7 percentage points over the next 15 years. . . . That may not seem like much. But if the baseline growth rate is only 2%, as most economists now think, boosting that to 2.7% annually makes a big difference. By 2031, the higher growth rate pushes up GDP by 11% compared to its previous path, or $2.7 trillion (in 2016 dollars). That’s enough to significantly lift incomes and living standards.

Now there is reason to think that productivity growth is set to rise somewhat anyway as temporary hangover effects from the financial crisis fade. Even productivity pessimist Robert Gordon, author of The Rise and Fall of American Growth, doesn’t think US productivity growth will continue to flatline. He’s been predicting productivity growth of 1.2% over the next 25 years, “not that dissimilar to what it has been over the last 45 years, with the exception of that one single dot-com decade when we did better.” Goldman looks for a longer-term pickup in measured productivity growth to 1½% in the US. (Of course the bank has also been arguing that mismeasurement could be worth 0.5-.07 percentage points on the annualized growth rate vs 0.25 two decades ago.)

Hopefully the Mandel-Swason forecast would be in addition to the cyclical rebound. Because that’s what we really need to offset demographic factors lowering potential growth. Plus, we need to make sure that growth is broadly beneficial, a bigger challenge today than a generation ago.