Solving the Productivity Paradox

Despite all the productivity we see around us, most mainstream economists believe we are in era of low productivity growth, reflecting the reported productivity numbers. That’s a problem for the Great Disruption argument, because if productivity growth is low, then surely talk of disruption is at best overblown. Maybe the robots aren’t coming after all.

Those of who believe the data – “true believers” – offer several explanations for this disconnect: low productivity growth in the service sector which dominates the economy; innovations that aren’t sufficiently important to move the economy; lags between innovations and the subsequent diffusion of innovation; and growing gaps between leading companies and lagging ones in many sectors of the economy, fueled perhaps by a disinclination to invest.

But maybe these true believer theories explain outcomes that don’t really exist. Maybe the productivity data are bad.

There are a lot of problems with the data:

  • They are poor at capturing both quality changes and new products.
  • They are especially bad at measuring services (about 80% of the economy), where it’s hard to conceptualize outputs, let alone measure them.
  • They struggle mightily with free (Facebook/Google) and near-free (Netflix) services.
  • They completely fail to address nonprofit and government sector productivity, and don’t include non-market activity (like environmental gains).
  • They don’t account properly for rapidly growing investments in intangible assets.
  • And they miss out entirely on the black economy and on much of the gig economy.

Together, these arguments easily explain the “missing” 1.5 percent of annual growth that separate low and high growth economies.

The heretics can also adopt some of the true believer arguments: it may be that productivity is indeed depressed by lags and the growing innovation gap. But the overall conclusion is inescapable: the productivity paradox is mostly driven by bad measurement. There is nothing here to suggest that the Great Disruption is unreal, or even that it will be much delayed.

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