Economic Productivity: Are We Missing a Piece of the Growth Puzzle?

There are two primary factors for measuring the change in economic activity in our country, also referred to as U.S. GDP: population growth and productivity growth. In other words, our domestic economy grows as the result of two factors: more people demanding good and services (population growth) and increased economic output per person (productivity growth). Real U.S. GDP growth has maintained a range of 2-3% per year over the past few years—solid but not spectacular. One of the missing pieces for sustained economic growth above 3% has been a lack of productivity growth. Indeed, according to the Bureau of Labor Statistics (BLS), U.S. productivity growth since 2009 has averaged 1.3% per year. To put it into historical context, U.S. productivity growth has averaged 2.1% per year since World War II. Productivity gains seem to have moderated in the past decade. But why? The answer, at least in part, is that in the age of technology and mobile phones we may not be measuring productivity growth effectively. It may be as simple as not capturing the productivity gains in our daily lives from such things as iPhones, internet searches and Google Maps. Consider the following examples. Cameras People have stopped buying cameras. LensVid estimates that in 2010, 121 million cameras were manufactured worldwide. Fast forward to 2018, where only 19 million cameras were produced. What happened? The advent of smart phones. People are taking more photos than ever before, but not with their cameras—in 2017 alone it is estimated that there were 1.2 trillion digital photos taken globally, which was a massive increase over prior years. We are using our phones as cameras today—taking more photos and paying virtually nothing extra to do so. Consider the old days, when photography required several layers of costs. First, a consumer had to buy a camera and film in order to take pictures. Second, a consumer had to pay to have their film developed and printed into pictures. Today, most digital photos are not developed and printed at our local drug stores: they are reviewed instantaneously and posted to social media and other digital media. The average consumer pays virtually nothing for their photography today, all the while possessing a powerful and convenient camera available to them at almost all times. Consider the GDP measurement of photography. By buying a camera in the old days and paying to have pictures developed, these transactions registered as economic activity. In today’s world, our free photos taken by our iPhone are not measured in the GDP report—even though Americans are taking more pictures than ever before. Information Search Do you remember owning an Encyclopedia Britannica set? Many families (and all almost all public libraries) owned a set of encyclopedias in the old days. It used to cost several hundred dollars to purchase the many volumes of books. And because the information was printed, it was not uncommon to purchase a new set of encyclopedias every few years, simply because facts and information needed to be updated. The last edition of Encyclopedia Britannica was printed in 2012. Why? Because of Google. Today, facts and information are much more accessible and at our fingertips. What is the population of China? Who won the Nobel Peace Prize in 2002? What year did the Spanish American war start? We don’t need to pay for this information today. We simply Google it. And it’s free. Economists estimate that access to Google search is literally worth several thousand dollars per year, per person. But we as consumers don’t pay anything for the service. Navigation Do you remember getting lost while driving? Do you remember stopping at a gas station to ask for directions? Do you remember arriving late for an event, or missing an event entirely, because you couldn’t find an address? Due to technology, we have virtually eliminated the phenomenon of getting lost. If you have a smart phone today, you have access to Google Maps. It’s a free app that directs people in real time to a location, with detailed and accurate instructions. What is Google Maps worth to the average consumer? Whatever the value, it is significant. And it’s not being measured in today’s economic activity because it’s free. Conclusion Due to today’s technological advances, there are many valuable (and free) things which are unaccounted for by our current economic measurement system. While this isn’t to suggest that productivity growth in the U.S. is greater than it has been before, it does indicate that there are reasons that we may not be lagging behind. GDP growth is an important long-term factor in the returns of the stock market. Thus, we hope that the latest changes to productivity can be properly measured to provide a better reading of our country’s true economic health and corporate profitability.   [1] [2]