As the US recovers from the financial crisis, economic policies that encourage capital investment and job creation must be our top near-term priorities. But, to achieve long term economic growth, as well as gains in our standard of living, the US must also focus on innovation and productivity growth.
US labor productivity - “the amount of goods and services that a laborer produces in a given amount of time” - grew at only 1.5% between 1973 and 1995. This period of slow productivity coincided with the rapid growth in the use of computers in business, giving rise to the Solow productivity paradox, in reference to Robert Solow's 1987 quip: “You can see the computer age everywhere but in the productivity statistics.”
But, starting in the mid 1990s, US labor productivity surged to over 2.5%. In an analysis of US labor productivity over the previous fifty years, Harvard economist Dale Jorgenson and his collaborators concluded that “the pessimism of the computer productivity paradox gave way to near-universal belief in a productivity resurgence led by information technology in the late 1990s.”
This IT-based productivity resurgence has continued, except for a short period that reflects the declining IT investment right after the bursting of the dot-com bubble, and the maturing of the global economic expansion in 2005 and 2006. Even as economic growth has lagged in 2009 and 2010, productivity growth has remained robust.
This productivity growth was led by IT producing companies during the dot-com bubble years of the 1990s, e.g., developers of semiconductors, hardware and software. But since 2001, the productivity growth has been led by IT-using industries, especially those industries that are intensive users of IT, like retail trade, scientific and technical services and financial services. Given their fast declining prices, these companies have been able to acquire and deploy significantly more information technologies across all their operations.
In a recently published book, Wired for Innovation: How Information Technology is Reshaping the Economy, Erik Brynjolfsson and Adam Saunders explore the links between the current wave of IT-based business innovation and the productivity resurgence in the U.S. economy. Erik Brynjolfsson is professor in MIT’s Sloan School of Management and Director of the MIT Center for Digital Business. Adam Saunders is lecturer at the Wharton School of the University of Pennsylvania, as well as a doctorate candidate at MIT’s Sloan School.