Recent productivity data have led to growing concerns over a slow-growth future. The technologies of today don’t seem to be greatly raising economic growth, and productivity growth has markedly slowed. Economic growth rates across major economies are weaker now than before the 2008 global financial crisis, and not just as a result of the crash.
If companies are more nuanced about how they invest in technology and how they embed it into their operations, then a slow-growth future can be avoided.
The United States, like the eurozone, Japan and the U.K., has been experiencing a slowdown in productivity growth since the mid-2000s. This has led to warnings that growth in these advanced economies has permanently slowed, in part because their aging populations will be less productive.
Could these economies be facing what former U.S. Treasury Secretary Larry Summers describes as “secular stagnation”? This was a term first used by Alvin Hansen in the 1930s to describe slow growth due in part to aging societies, among other issues. Some of Japan’s economic stagnation is thought to be related to its demographics since its population is the oldest and fastest-aging in the world.
Economic growth occurs when workers and capital are added to the economy, along with technology, a well-known result from growth models first developed by the Nobel Prize-winning economist Robert Solow. But an aging population means fewer workers. Fewer workers require fewer office buildings and machinery, which depresses investment and therefore the economic outlook.
Another wrinkle is that the U.S. has been suffering from stagnant median wage growth for decades. Low pay means that some companies hire workers instead of installing more units of capital, which further depresses investment. That means that two factors that drive growth are subdued.
That point of where demographics hits growth seems to be approaching: U.S. labor-force growth has slowed to just 0.2% a year, down from 2.1% from the 1960s to 1980s. A slower growth rate is associated with lower interest rates, and this is seen in the yields of Treasury bonds along the yield curve. In other words, the expectation in bond markets is that the new neutral interest rate, or where the current rate rises will end up, will be lower than the previous average rate of 5%.
The Organization for Economic Cooperation and Development (OECD), the think tank for rich countries, has looked at this issue and finds that weak output growth is a drag on productivity. That brings us full circle in that output per worker or machine can’t increase strongly if overall economic growth remains subdued.
So how much is invested, including in raising the skills of existing workers, matters a great deal to boost growth. It also means that the new path of economic growth, whether it is fast or slow, is within the control of the government and firms as well as workers who can invest in their own human capital to be better equipped to use technology. It is not just the inevitable outcome of an aging society.
But one challenge is that recent technological improvements, centered on information and communication technologies and the internet, do not seem to have raised productivity across the economy as expected. Solow’s 1987 observation that “you can see the computer age everywhere but in the productivity statistics” is known as the Solow paradox. He revisited this question decades later, but concluded that we still do not know whether computers have boosted productivity as the role of computing is still evolving.
Where there have been periods of faster productivity growth, such as in the late 1990s, it seemed to be due to technology being better embedded into business practices. Embedded technology improves the productivity of workers, which increases capital accumulation by slowing down the diminishing returns to capital. Diminishing returns happen when a worker is given more than, say, one computer; that worker won’t produce as much with the second computer as compared with the first one unless he has the programming skills to run an algorithm that allows computing to be done without the worker using it all the time.
If the digital age is to increase productivity and lead to a stronger phase of economic growth, it will require investment in not just R&D, but also peoples’ skills and firms’ practices to embed those technologies into how businesses operate. An example is law firms that are starting to use AI to conduct some aspects of due diligence, which frees up the time of junior associates to undertake other legal work.
Although the Solow paradox is still with us, there are signs that technology is becoming better embedded, such as artificial intelligence that can do computing without a constant human presence. But to ensure that happens requires investment in more nuanced ways — notably in how to embed tech into the workplace. This will vary from firm to firm, but investing in this area, as well as in the well-understood areas of R&D/innovation, will likely generate returns.
It could even lead to a virtuous circle of growth. Seeing higher output per worker could induce more investment by firms as the returns to capital are higher. And more investment in turn raises economic growth rates, and that could help us avoid a slow growth future.
So, reassuringly, demography is not destiny. It is within our control to invest in ways that better embed technologies, which in turn would help us to avoid a slow growth future.