The holy grail of traditional economics lies in strong technology-led productivity growth.
Other types of growth are resource intensive (capital or labour) and suffer from diminishing returns. You can throw more and more capital into the GDP-producing pot (through increasing fixed investment as a percentage of GDP), but it will have less and less of an effect. This is what happened to the Soviet Union and Japan in the past, and this is what will happen to China in the future. (Resource intensive input growth can also sometimes produce an expansion of GDP, but not necessarily a rise in well-being–think spoiled environment.)
Similarly, you can throw more people into the GDP-producing pot, or make them work harder (more hours), or educate them to work smarter. But all three sources of growth also have limits.
So if you want quality, sustainable growth, you want technology-led productivity to expand. Will it? Last week, a short comment published by productivity researchers John Fernald and Bin Wang on the Federal Reserve Board of San Francisco web site looked at this issue. Fernald and Wang note that the ‘go go’ GDP growth years of the late 1990s were mostly built on labour productivity (click for larger image).
But as I noted above, labour productivity can, in turn, be thought of as resting on the availability of more capital, better education or technological advance. Economists generally refer to the last type as total factor productivity (TFP). Think of it as a measure of innovation. And you can see which industries have been driving that innovation here (click for larger image):
In IT-intensive industries in particular, there has been a step-change downward in innovation-led growth. Moreover, the non-IT industries have seen no TFP growth since 2007. But Fernald and Wang want to stress that innovation gains were struggling before the financial crisis hit:
The most recent slowdown in productivity growth predated the Great Recession of 2007–09. Hence, it does not appear related to financial or other disruptions associated with that event. Rather, it appears to mark a pause in—if not the end of—exceptional productivity growth associated with information technology.
This is one reason why I feel that Western countries will struggle to raise GDP growth above 2% any time soon.