by The last time the U.S. economy posted surprising economic growth numbers amid rapid wage increases and moderate inflation, Ace of Base and All-4-One topped the Billboard charts and denim overalls were all the rage.
Thirty years ago, Federal Reserve officials hotly debated whether the economy could continue to advance so vigorously without spurring a spike in inflation. And back in 1994, it turned out you could, thanks to one key ingredient: productivity.
Now, official productivity data shows a big rebound for the first time in years. Data has been volatile since the start of the pandemic, but with the emergence of new technologies such as artificial intelligence and the adoption of hybrid work setups, some economists wonder if the recent advances could be real and if they can become an experience durable. boom.
If the answer is yes, it would have enormous implications for the American economy. Higher productivity would mean that companies could create more products per worker. And a steady rebound in productivity could allow the economy to take off in a healthy way. More productive companies can pay better wages without having to raise prices or sacrifice profits.
Several of the current trends have parallels to what was happening in 1994, but the differences explain why many economists are not ready to declare a turning point yet.
The computer age versus the zoom age
By the late 1980s, computers had been around for decades but had not yet generated large gains in productivity, known as the productivity paradox. Economist Robert Solow said in 1987, “You can see the computer age everywhere but in the productivity statistics.”
That changed in the mid-1990s, when semiconductor manufacturing improved and computers became cheaper. Companies began to learn how to invest in information technology and this contributed to increased productivity.
For years, economists and analysts have wondered whether we might be experiencing a new productivity paradox: Despite our sudden access to cloud computing, fast Internet connections, and mobile phones, productivity gains were tepid in late 2000s. the 2000s and throughout the 2010s.
Since 2020, companies have learned to leverage existing digital tools in new ways as employees transitioned to remote work. Will that cause lasting efficiency improvements in some sectors?
Until now, it remains hotly debated whether remote work is good or bad for productivity, as a recent paper by Nicholas Bloom at Stanford and other researchers explains. Early research has suggested that employees may be less efficient when fully remote and that hybrid work generates small, if any, productivity gains.
But workers who save time on commuting and grooming often feel more productive, even if that saved time isn’t reflected in official productivity data.
“Studies probably underestimate the effect,” Bloom said, explaining that employees who are happier thanks to work flexibility may be less likely to quit, helping companies avoid unproductive retraining. Remote work could also allow companies to move more “tedious” jobs overseas, she believes, pushing Americans toward more dynamic jobs.
“The aggregate story is potentially quite powerful,” he said in an interview, predicting that remote work is halfway to unleashing a decade-long productivity boom. “We are in a brave new world: it will take years.”
Internet versus artificial intelligence
In the 1990s, the World Wide Web was becoming widespread. At first, companies worried it could divert their workers. (“Oh, what a tangled web, this Internet,” a 1995 article in The New York Times sighed about online distractions.) But the tools ultimately simplified many types of work.
A retrospective of the 1990s boom found that a combination of efficient computer manufacturing and greater use of information technology accounted for about two-thirds of the productivity growth of the time.
The equivalent of today’s shiny new technology is artificial intelligence. While many economists said it was probably too early to see the benefits of AI in full force, some advocates believe it could prove transformative by automating mental tasks, including proposal writing and emails.
“There’s a lot more to come as more people adopt these things,” said Erik Brynjolfsson, a Stanford economist who is optimistic that we may be on the cusp of a productivity takeoff as white-collar workers develop their skills. everyday skills. increased with new tools. He has conducted experiments and found that AI helps workers, and has co-founded a company that advises companies on how to best use the technology.
But Robert Gordon, a leading productivity economist at Northwestern University, is skeptical. He said that unlike the computer and Internet era, the biggest impacts of AI may be in office work, while computer manufacturing also became more efficient in the 1990s, allowing for profits. in various sectors.
“I don’t see the universality of AI sweeping the economy with that multi-sector impact,” Gordon said.
Walmart versus online shopping
Another driver of the 1990s productivity boom? Companies were making major logistical improvements. Walmart grew rapidly over the decade, bringing with it strong supply chain management that allowed it to efficiently stock shelves with cheap products from around the world. The manufacturing industry, especially pharmaceuticals, also improved.
One potential challenge is that such gains are difficult to achieve twice: now that companies have become more efficient, they may find it difficult to improve dramatically. Online shopping continued to revolutionize retail in the 2010s, for example, but increases in both industry and overall productivity were modest.
This underscores an important point about productivity growth. It’s easy to pick easy goals, like optimizing supply chains using software. Once this is done, it may be more difficult to make progress. The economy ends up with higher levels of productivity, but not necessarily with sustained high productivity growth.
Entrepreneurship boom
What can lead to lasting increases in productivity is a burst of self-feeding innovation, and that makes the recent rebound in business formation a hopeful sign. New companies tend to be more inventive.
In 1994, many companies were formed as people tried to take advantage of advances in information technology. Today, business applications have increased again, likely as a result of people deciding to go into business on their own after losing or quitting their jobs amid the pandemic.
The new business boost could simply reflect that people were shifting to home work, recent research by Fed economist Ryan Decker and John Haltiwanger of the University of Maryland has suggested. But many of the startups are in potentially productivity-boosting fields, such as online retail, software publishing, computer systems design, and research and development services.
Two falls in inflation
The 1990s and 2020s have in common another potential boost to productivity: the decline in pricing power.
By the mid-1990s, inflation had been cooling for years, and Federal Reserve officials noted in their meetings that businesses were losing their ability to continue raising prices without losing customers. To prevent profits from plummeting, companies had to figure out how to be more efficient.
“We will necessarily tend to get an increase in productivity because it is being imposed on the system,” Alan Greenspan, then chairman of the Federal Reserve, theorized during a Federal Reserve meeting.
Inflation is also going down today. And the labor market was strong then and is strong now, meaning companies have had to pay to attract workers. When wages rise faster than prices, companies must demand more from their workers if they hope to maintain their profits.
Alan Greenspan vs. Jerome H. Powell
In 1996, Greenspan was convinced that productivity was increasing, so he convinced his colleagues that they did not need to try to slow the economy as much. By improving productivity, strong growth was less likely to cause inflation.
Jerome H. Powell, the current chairman of the Federal Reserve, has praised Greenspan’s “strength” and foresight in facing that period.
Maybe it’s a lesson I can take advantage of in the coming months. Growth remains stronger than Federal Reserve officials expected, and policymakers will have to decide whether to react by keeping interest rates high for longer.
For now, Powell is not convinced that the United States is experiencing a new productivity boom. “My guess is that we can recover and get back to where we were,” he said during a Jan. 31 news conference.
But he acknowledged: “I don’t know.”
In the 1990s, it took until 1999 for economists to really believe that productivity had taken off, said John Fernald, an economist at INSEAD Business School. So while hope shines now, trust could take years.
