Prices of High-tech Products, Mismeasurement, and Pace of Innovation
June 27, 2017
By David Byrne, Stephen D. Oliner, and Daniel Sichel
Introduction
Economists and others have offered many explanations for the slowdown in U.S. productivity growth that began in the mid-2000s, with labor productivity in the business sector rising just over ½ percent at an annual rate from 2010 to 2015, well below the pace over the boom years of 1995-2004 and even below the already reduced rate that prevailed over 2004-2010. Focusing on the supply side of the economy, Gordon (2016) argues that the IT revolution is just not as big a deal as the second industrial revolution and that the boost to productivity growth rates from IT largely is behind us. Focusing on the demand side, Summers (2014) has resurrected the Depression-era term “secular stagnation,” arguing that the economy is generating insufficient demand. Others have argued that the tools of economic measurement have not kept up with the digital revolution and that economic growth has been stronger than reflected in official statistics. One strand of this argument focuses on items within the current scope of GDP, positing mismeasurement of key GDP components. (See Goldman Sachs (2015 and 2016), for example.) Another strand looks beyond the current scope of GDP, making the case that economic welfare has improved much more rapidly than have measures of productivity.
This paper contributes to the “within GDP” debate, focusing on the mismeasurement of prices of high-tech products. As noted, Goldman Sachs and others have made the case that the productivity slowdown can be explained, at least in part, by mismeasurement of the digital economy. Since that argument emerged, two papers have countered that claim. Byrne, Fernald, and Reinsdorf (2016) carefully examined the evidence and concluded that mismeasurement does not provide an explanation of the slowdown. Syverson (2016), using a completely different methodology, also made a compelling case that mismeasurement cannot explain the productivity slowdown.
REUTERS/Kim Kyung-Hoon
But, is this the end of the story? Should we conclude that mismeasurement of high-tech prices and the digital economy have no important consequences for patterns of economic growth? This paper argues that mismeasurement does matter. In particular, mismeasurement matters for the allocation and pattern of multifactor productivity (MFP) growth across sectors. To demonstrate this, we take estimates of the amount of mismeasurement of prices of high-tech products from the literature and feed these through a standard growth accounting framework to examine the implications of this mismeasurement for sectoral MFP growth.
Our results show that the mismeasurement of high-tech prices has a dramatic effect on the pattern of MFP growth across sectors. Specifically, the faster decline of prices of high-tech products implies a faster pace of MFP growth in high-tech sectors and a slower rate of MFP advance outside the high-tech sector. If we take MFP growth as a rough proxy for the pace of innovation, our results suggest that innovation in the tech sector has been more rapid than the rate that would be inferred from official statistics (and even slower outside high-tech). At the same time, our results confirm that this mismeasurement does not explain the labor productivity slowdown and has a relatively modest effect on aggregate MFP growth.
We believe these results are important for three reasons. First, they deepen the productivity puzzle. If the pace of innovation in the high-tech sectors has been more rapid than indicated by official statistics, then it is perhaps even more puzzling that overall labor productivity growth has been so sluggish in recent years. Second, we believe narratives about the prospects for growth have been improperly darkened by the view that innovation, even in the tech sector, has been weak. According to official statistics, prices of tech products have barely been falling in recent years. And, that slow rate of price decline in the tech sector has implied, via the dual approach to productivity measurement, a slow rate of MFP growth. This has led, in turn, to inferences that the pace of innovation in the tech sector has faltered. Finally, a faster rate of innovation in the tech sector implies, via a multi-sector growth model, a faster steady-state rate of growth in labor productivity even with the slower rate of MFP growth outside the tech sector. Accordingly, we argue that the pattern of MFP growth across industries may presage a second wave of productivity advance supported by the digital economy.