The tech revolution hasn't revolutionized economic growth

The tech revolution hasn't revolutionized economic growth
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A tempting story about the slowdown in productivity growth — and hence of economic growth in general — is that it doesn’t exist. In this story, we are in fact experiencing rather rapid economic growth, and in particular, rapid technological change.

However, the Bureau of Economic Analysis (BEA) has failed to encapsulate this in its standard measure of GDP. Hence, the growth slowdown that its GDP statistics indicate started around the turn of the century is a figment of our imaginations.

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The reason for the BEA’s failure, according to the story, is that it is trying to back out a measure of real economic activity from nominal data. Nominal GDP, which is the total dollar value of transactions in the economy, can grow for two reasons. Either more real goods and services were bought and sold, or the nominal prices of the goods and services went up.

 

To figure out the growth in real goods and services — growth in real GDP — the BEA subtracts off the growth in prices from the growth in nominal GDP. If the BEA uses an overestimate of the growth in prices, then they’ll get an underestimate in the growth rate of real GDP. The story that the growth slowdown is a mirage relies on the claim that price growth is in fact overstated.

The only problem is that the story is wrong. A recent study by Brent Moulton, a retired associate director of the Commerce Department division that produced these GDP estimates, dug back into how the BEA has calculated price growth over the last few decades.

He found that the errors it makes in calculating price growth are in fact smaller now than they were in the early 1990s. This he traces back to the Boskin Commission, which in 1996 studied this same exact question, and came to the conclusion that the BEA was overstating price growth in a systematic way.

Since then, the BEA has adopted a number of the recommended techniques to improve the calculation of price growth. In addition, they went back and adjusted all of the historical calculations to account for the same problems, so that the comparison of real GDP growth between the 1990s and now is a fair one. The growth slowdown is real.

This conclusion can seem counterintuitive when one considers the vast number of technological changes that appear to have taken place in the last 20 years at just the same time that the growth rate of real GDP has fallen.

How can growth be so slow when we’ve seen the arrival of generation-defining technologies like the internet and smartphones? One reason is that while those technologies have engaged tremendous amounts of our attention, they still do not account for tremendous amounts of our economy.

Even though Amazon, Apple, Facebook and Google have become massive companies, they account for only a tiny fraction of economic activity in a nation like the United States.

Even if their production of real goods and services were still understated by the BEA after all the updates to their methodology, Moulton’s work suggests that there would be little effect on measured real GDP growth.

A second reason is that we have always failed to capture the true contribution of most technologies. The widespread adoption of refrigeration in the middle of the 20th century was captured in real GDP only through the value of refrigerators bought and sold, but did not take into account the improvements in health this allowed due to less food contamination.

It did not take into account the spillover effects — good or bad — that the refrigerator had due to our ability to shop less frequently.

In a similar manner, real GDP is not capturing the total effects of modern technology on our ability to communicate more rapidly and is not capturing the spillovers that this has — good or bad — on our communities and families.

But if you want to adjust GDP statistics to capture the effect of modern technologies, then you have to go back and adjust GDP statistics to capture the effects of older technologies as well.

The story that the growth slowdown is a mirage is tempting, in part because the technologies that we are presumed to be mis-measuring are so present in our attention on a day-to-day basis. It would be nice to find out that economic growth is zipping along faster than we thought.

But the errors in measuring price changes that this story requires have been addressed in large part by the BEA, as the study by Moulton documents. Whatever adjustments might still be made appear to be nibbling around the margins.

The slowdown in real GDP growth observed since the turn of the century is a real phenomenon, however spectacular the technological innovations observed in the last few decades.

Dietrich Vollrath is a professor of economics at the University of Houston. He is the co-author, with Stanford's Chad Jones, of the third edition of the textbook, "Introduction to Economic Growth," (W. W. Norton & Company).