GDP And Productivity

It seems to me….

The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.” ~ Simon Kuznets[1].

U.S. economic recovery following the 2008 economic crisis, though better than in many other advanced nations, was less rapid than many anticipated. Of even greater concern, economic growth (the product of productivity and demographics) has been declining essentially since the 1970s according to the Bureau of Labor Statistics (BLS).

There remains considerable debate as to why this is true. Many believe productivity is not being accurately computed; that the BLS, which remains focused on production of physical items rather than factoring in the effects of computerization and automation, though both the BLS and the International Monetary Fund (IMF) disagree and believe this not to be correct. In fact, not only are BLS figures incorrect, they no longer even appropriately measuring the correct items.

The standard metric of economic performance is the gross domestic product (GDP) but GDP is a failing metric less reflective of how our economy is performing with each technological advancement. Widespread adoption of automation and computerization in part necessitated in reaction to the 2008 economic crisis resulted in elimination of large numbers of traditional lower and middleclass employment opportunities allowing fewer employees to create more product output, a trend missed by many economists as the GDP increasingly failed to reflect actual economic status. 2008 might be considered the start of what is essentially a post-manufacturing age as any analysis clearly displays a distinct transformation in production and employment trends apparent at that time.

While GDP is the best metric currently generally available for understanding our economy, it no longer is able to accurately provide sufficient insight into the economy’s performance. GDP, by itself, fails to measure what is becoming increasingly important in advanced societies – that employment, innovation, and productivity are shifting from product manufacturing to services, entertainment, and intellectual endeavors. GDP, as has frequently been noted, also fails to reflect much that makes life worthwhile; e.g., art, literature, stage and screen, leisure….

Technology has further lessened the usefulness of GDP by providing free or very inexpensive access to much that previously was costly or unavailable and fails to reflect contributions from the introduction of new products and improvements in existing products.

Digitization is especially difficult to measure. Encyclopedias were expensive but now are essentially free (though Internet access and an access device must be purchased). Typewriters were relatively expensive; any computer can be a word processor. Precise location information was not available at any price; GPS location is free. The actual value of items has substantially increased but that value is no longer factored into the GDP.

Additionally, zero-wage, zero-price activities such as preparing and accessing social media sites are not counted in the GDP. Similarly, the growth of the sharing economy (Uber, Airbnb…) do not contribute. On-line educational information (YouTube, Wikipedia…) increase knowledge and capability to acquire new abilities which previously would only have been available in costly training classes but now are free.

How does our GDP reflect the change in music purchases from physical media to digital downloads? The total purchase volume increased, price has decreased, but music purchases no longer contribute to the reported GDP.

How does the value of a Skype call compare to a traditional phone call? The visual face-to-face interaction available using Skype was not previously available at any price but is now essentially free but not factored into the GDP.

Anyone with a telephone has immediate access to more information than anyone using even the best encyclopedia twenty years ago. As stated, not only is that information essentially free, it no longer contributes to our GDP. There no longer is a market for encyclopedias.

These changes have affected all aspects of the economy. Innovation in the form of computerization and automation surpassed an inflection point such that productivity improvements are impacting the number and quality of employment opportunities through creation of entirely new categories of products. Improvement to existing products has resulted in enhanced product quality while being produced by a rapidly decreasing number of workers. This has primarily impacted middleclass employment resulting in an apparent slowdown in productivity increases which will continue to mainly affect future traditional blue-collar employment opportunities. Steps necessary to reverse this trend includes increased infrastructure repair and improvement, education and training/retraining availability, and emphasis on research and development.

Economists agree that a nation’s standard of living is directly dependent upon its productivity rate – increasing output from an equivalent number of inputs; e.g., manufacturing output per worker; normally results in an improved living standard. Productivity is therefore historically dependent upon innovation. While GDP is the standard by which we typically measure productivity (the term “productivity” generally refers to “labor productivity”), productivity growth is driven by innovation in technology and production improvements. This is the area where the system is showing indications of difficulty. Regardless of how it is measured; e.g., capital productivity or multifactor productivity (the weighted average of both labor and capital), something called the “Solow Residual[2]”; all indicate a remarkable productivity improvement directly correlated to technology introduction and use.

GDP becomes increasingly misleading in what we attempt to measure and with the creation of every new item or service that never previously existed, when current items are digitized, or when the cost of some item is eliminated.

Measurement of several additional quantities are necessary to improve the accuracy of economic quality not currently represented in the GDP – it must include intangibles that add to the value of the economy. While technology has altered what is factored into GDP calculations, it also has provided the means for improvement. Data collection and Internet transmission has increased exponentially over recent years and there isn’t any indication this increase will soon lessen. There is a principle that only what gets measured gets done and developing technology, such as the IoT, provides an available resource for collecting that data.

The importance of GDP, or whatever metric replaces it, has numerous implications for the economy. Increased economic growth would better resolve national debt concerns than additional austerity demanded by conservatives; a GDP increase of just 0.5 percent would solve current budget difficulties. We need an improved method of measuring it.

That’s what I think, what about you?

[1] Simon Smith Kuznets was an American economist, statistician, demographer, and economic historian who received the 1971 Nobel Memorial Prize in Economic Sciences.

[2] Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him.

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About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
This entry was posted in Airbnb, Automation, Automation, Automation, BLS, Bureau of Labor Statistics, Computerization, Digitization, economics, Economist, Economy, Education, Employment, Employment, employment, Encyclopedia, GDP, GPS, Gross Domestic Product, IMF, Infrastructure, Innovation, International Monetary Fund, Internet, Internet of Things, IoT, Jobs, Productivity, Retraining, Skype, Solow Residual, Technology, Training, Typewriter, Uber, Wikipedia, YouTube and tagged , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

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