Productivity is low for reasons that are hard to explain. But maybe we have been looking at the ‘problem’ in the wrong way – perhaps our historical benchmark was unique and can’t be repeated

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Some people (like me) think there is a productivity puzzle.

For a decade or more now, we have been fast-tracking technology features that clearly allow users to do a lot more exciting things for very little cost. On the face of it, ‘output’ is up, while inputs are down. By my old-fashioned thinking, that should show up in overall productivity, especially as this new tech is becoming ubiquitous.

But it isn’t. New Zealand’s productivity measures are poor, and not getting any better.

In fact, it isn’t just a New Zealand problem. Low productivity growth is everywhere. And it is not getting any better in most other countries either.

Why not?

It has been argued that the GFC impacts have been masking the improvements. Just when tech benefits rose to scale, the GFC added a whole bunch of cost inputs (like laid-off workers) that had no outputs. The problem with this argument is that we are well past that event – especially in New Zealand – and the productivity results aren’t any better.

It is also argued that the ‘outputs’ counted in the measurement of GDP aren’t designed to capture the tech benefits. More specifically, some say that they aren’t measured in ‘final’ output, rather are pushed aside into intermediate outputs. That may or may not be the case, but the raw fact is, people have been looking for a decade now and not found these uncounted benefits. If they are significant, you would think someone would have noticed them by now.

Still others have argued that it takes a surprisingly long time for tech benefits to show up economy-wide. Or this reason, or this one.

Frankly, it’s embarrassing, not the least for economics. It has all the hallmarks of a real puzzle.

Unless it isn’t.

English economic boffin Adair Turner is suggesting that there is nothing to explain.

In a paper that has been described as “scintillating” he is suggesting that tech innovation and low measured productivity is exactly what we should expect. And he suggests, this will be the future.

In the past, technological progress and productivity growth have tended to coexist because the workers shifted as a result of the new technologies. They moved from one sector (say, farming) to another (manufacturing) and in both sectors rapid productivity growth occurred.

But Turner says it will be different from now on. New technology’s impact on total productivity growth results in benefits to a smaller group who are choosing to consume those benefits and their additional consumption is of services that are hard to automate, like personal services and artistic assets. At scale, that means overall productivity is undermined by that consumption.

The older situation where the shifting of resources from one area of the economy to another (agricultural labour to manufacturing labour) may be a one-off. Now we are shifting economic labour from manufacturing to services. Manufacturing productivity is zooming (the cost of things is diving) but the much larger service sectors can’t deliver similar gains. So we can only see a low average change in productivity.

It’s a services handbrake. And it won’t necessarily get better in the future as societies age. The provisions of personal services are high-cost activities (needing high levels of employment), but the output values are relatively low. That is a recipe for low productivity, long into the future.

And if we can organise things so that our incomes rise, that will just make things worse in a productivity sense – because we will spend those higher incomes increasingly on personal services.

For example, demand for healthcare services will mean healthcare workers will capture more of our incomes (think doctors and nurses, also think the tech companies making medical machines for ‘essential’ and ‘better’ services) while providing essentially unchanged outputs. We are part of this problem; we want the best especially if the taxpayer is paying. It is probably similar in education. And in both these huge sectors, as long as they are state-owned and centrally managed, things won’t get any better – they will only get costlier without any productive improvement (that is, costs will rise as fast as benefits). The same might be the future of tourism activities.

And the production of ‘things’ will get less and less expensive with more and more benefits (that is more productive – again, think NZ farming) but have a much lower cost impact on our incomes and lives (less of our incomes are now spent on food, and for some food spend, more and more of it pays the wages of the service people delivering eat-out ‘experiences’). There is no advantage at all trying to make cars, or mobile phones, or any other mass consumption item locally. If we tried, then we wouldn’t have any disposable income.

Turner thinks the future is high tech and low productivity.

Get used to it, he says.

It’s a long paper (47 pages) but I thoroughly recommend you find the time and the motivation to read it (especially if you wish to comment below).

This is how he starts:

I set out my arguments in six sections

1. When, not if.
It is likely that we are in the early stages of a technological revolution which will eventually result in the automation of almost all economic activity, almost all work activities. When considering automation potential, the question is when, not if.

2. Explaining the Solow paradox
Nobel Prize winner Professor Robert Solow famously commented that “computers are everywhere but in the productivity statistics”. But there is here no inexplicable paradox since super rapid technological growth is bound to result in a proliferation of low productivity jobs, zero-sum competitive activities, and increases in real consumption which never show up in GDP statistics.

3. Meaningless measures in the Hi-Tech Hi- Touch economy
Rapid technological progress will make GDP measures decreasingly useful indicators of improving human welfare and will have the paradoxical effect of creating an economy dominated by inherently physical and subjective assets and capabilities, and by zero sum activities, with income distribution strongly determined by asset ownership and rents

4. “Average is over”?
In rich developed countries, rising income and wealth inequality is inevitable unless we choose deliberately offsetting policies.

5. The old ladder destroyed
Historical experience illustrated only one way to achieve rapid economic catch up – starting with low wage export-oriented industrialisation. In a world of robots, that old ladder will no longer exist.

6. Implications for economic theory
In a world of ubiquitous robots, many of the assumptions of neoclassical economics become decreasingly valid or relevant.

If you are like me, you probably don’t often read long economic papers. But this is one you probably should make an exception for.

We need a way to get out of the services trap – we need to find a way to shift workers from a low-productivity service sector to a high-productivity service sector and get that amazing boost the rural-to-factory shift gave us a century ago.

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