The Great Productivity Boom Ahead

The Great Productivity Boom Ahead
The United States is experiencing a surge in worker productivity. Cumulatively, we expect the impact of this wave to far exceed that of the 1990s tech boom.
Technology Briefing


The Golden Age of the Digital Techno-Economic Revolution is blooming right before our eyes. As Trends predicted, the United States is experiencing a surge in worker productivity. Cumulatively, we expect the impact of this wave to far exceed that of the 1990s tech boom. Businesses that combine innovation and customer-focus to extract value from the transformed economy will win big for their investors. However, the biggest winners will be “consumers at every level” who will receive a massive windfall from the new economy.

Consider the facts. Companies and customers are rapidly embracing new technologies, making it easier for American companies to produce more with fewer workers. And a growing number of economists agree that this could become a sustained boom delivering wide-ranging benefits for years to come. Productivity is normally defined in terms of the value of the output a worker can generate in an hour.

Throughout history increased productivity has proven to be the key to rising standards of living and wealth accumulation. When workers have the help of technologies, such as robots and artificial intelligence, they can make cars or process data much faster. As the history of the past 250 years shows, higher productivity leads to more goods and services available at lower costs, as well as increases in wages over the medium-term. Without it, economic growth is stagnant, limited mostly by the growth in available labor hours.

The early data on the current recovery is promising. According to the Labor Department, worker productivity grew 4.3 percent in the first quarter of 2021, one of the highest rates in years. Largely due to production bottlenecks, second quarter productivity growth slowed to 2.3 percent; but that’s still nearly double the anemic 1.2 percent a year productivity growth rate the United States experienced in the decade following the 2008-to-2009 financial crisis.

After the Great Recession, tech experts and economists struggled to understand why apparent breakthroughs with robotics and artificial intelligence were not translating into strong and sustained productivity growth during the rebound. As we explained at the time, the country was still mired in the inevitable “Transition Phase” between the Installation and Deployment Phases of the Digital Techno-Economic Revolution, that had begun in the early 2000s. Today’s quantum leap in human productivity was anticipated in 2013 by Fred Rogers and Richard Lalich in their book, Ride the Wave.

As predicted, it took 15-to-20 years following the Dot-com Crash for labor practices and regulatory constraints as well as physical and digital infrastructure to evolve to meet the needs of the so-called Deployment Phase. Then finally, the coronavirus pandemic forced rapid and widespread adoption of robots, artificial intelligence and e-commerce as well as trials of new business practices. Now, according to analysts from Goldman Sachs and the McKinsey Global Institute, conditions are ripe for productivity growth to remain elevated for years to come. Furthermore, because fiscal and monetary policy has combined to "run the economy hot," we’re seeing enhanced demand for products and services.

And since there is also a worker shortage, companies are being forced to innovate more than usual because they can’t find enough employees to fill the record 10 million U. S. job openings. Moreover, with the cost of capital being at historic lows, it only makes since that any time a robot or computer might be able to do someone’s job, companies are willing to try it. Not surprisingly, the accelerating improvement in the price-performance of technology, is causing more and more economists to conclude that the United States is on the verge of the biggest productivity boom since at least the late 1990s.

For instance, Professor Erik Brynjolfsson, director of Stanford University’s Digital Economy Lab forecasts “a productivity surge that will match or surpass the boom times of the 1990s.” Notably, Labor Department data shows that worker productivity growth averaged 3.1 percent a year from 1996 to 2004, largely due to the personal computing revolution. Economists have learned that transformative general-purpose technologies rarely cause a jump in productivity right away and that the impact lingers even after the innovation peaks.

Brynjolfsson argues that new technology needs time to “marinate” so companies can test how best to deploy it in their industry. Today, artificial intelligence and machine learning have “simmered” long enough to make a dramatic difference. So, these technologies are now ready for extensive deployment. Brynjolfsson goes on to say, “AI is a general-purpose technology that is affecting almost every industry while accelerating the pace of discovery.

Recent breakthroughs in machine learning will boost productivity in areas as diverse as energy technologies, retailing, finance, manufacturing, professional services, biotech and medicine. The productivity benefits of general-purpose technologies typically take years to show up in the official statistics. In fact, productivity is initially suppressed as organizations invest time and effort creating intangible assets like new business processes, new skills, new goods and new services. However later, these investments are harvested, boosting productivity. The result is a productivity J-curve.

Recent research indicates that we are approaching the rising part of the productivity J-curve for AI and related technologies.” As discussed in prior issues, America’s COVID19 response has acted much like our response to World War II to unleash a wave of productivity-enhancing change. The pandemic forced many businesses to dramatically shift the ways they operate as it was unsafe to have workers near customers or in close proximity to each other.

McKinsey found that businesses sometimes sped up their plans for the automation and digitalization of routine tasks 20 to 25 times faster than they had previously thought possible. Even meat processing that many thought would be one of the last industries to adopt robots began using automation and digitalization during the pandemic. The result has been a genuine change in our productivity trajectory. Diane Swonk, chief economist at Grant Thornton says, “I do think we are in a productivity boom. The pandemic forced us all to learn to use technologies at a rapid pace. It was tech adaptation on steroids.”

One example of technology improving productivity is illustrated by how quickly Americans embraced online ordering of food and groceries. In recent months, roughly half of Chipotle’s sales have come from digital orders through its own platform or other services like DoorDash, easing the company’s reliance on cashiers at a time when restaurant workers are tougher to find. According to chief executive Brian Niccol, "Even as in-person sales have bounced back at lunch, digital orders are not declining, enabling workers to process more orders." He predicts the revenue coming in from digital platform orders "will hold and will just keep growing from here."

In warehouses and factories, there was more widespread use of robots during the pandemic, a trend that appears likely to continue. Pennsylvania’s Lehigh Valley, a warehouse hub, is seeing a surge in applications from companies wanting to build “high cube” warehouses that are much taller so robots can travel vertically to retrieve items from high shelves, similar to a giant vending machine. It is much faster than having people walk around a large warehouse to collect items. Some companies are also finding new ways to harness machine learning.

Even before the pandemic, companies were automating scheduling and various administrative tasks. Now more sophisticated work is being increasingly done by machines. Recently, California software company Cadence Design Systems unveiled new software they dubbed Cerebrus, paying homage to the largest part of the human brain. It’s used to make microchip engineers more productive.

On a recent call with Wall Street analysts, Cadence executives said Cerebrus makes chip engineers 10 times more productive; that’s the kind of productivity gain that could ultimately lower chip costs, not to mention providing faster turnaround for new products. Then there is the work-from-home trend. New research finds teleworking could add a 5 percent boost to productivity, largely because workers save time from not commuting to the office. They can use that time to work or recharge.

While some workers are returning to the office, it’s likely that about half of those who have worked at home will continue working remotely while many others will work in a hybrid system with some days at home and some in the office. In July 2021, Labor Department data showed that 13 percent of Americans with jobs worked from home, down from 26 percent a year earlier.

Finally, the government’s pandemic-related decision to stimulate the economy using fiscal and monetary policy, like the war-related spending surge 80 years ago, has created a lot more demand than is normal when coming out of a recession or depression. This is helping drive investment in productivity and business capacity, which will pay big dividends in the years ahead.

Given this trend, we offer the following forecasts for your consideration.

First, this new productivity trajectory will be confirmed in 2022 and 2023. As sceptics observe, it’s common to see a bounce in productivity at the end of a recession; then it fades. That’s largely because companies have laid off so many workers that those who remain work harder to pick up extra tasks and impress bosses enough to stay employed in a scary situation; for example, is 2009 productivity growth jumped to 3.6 percent annualized.

James Manyika, chairman of the McKinsey Global Institute which forecasts productivity growth of over 2 percent a year through 2024 says, “So far it’s a mini boom, but it could turn out to be a bigger boom.” Similarly, David Beckworth, a senior fellow at the Mercatus Center at George Mason University says, “It looks like we’re on the cusp of a productivity boom, but you have to see it to believe it. The statistics coming out so far in this recovery show a productivity surge. Will that continue? It’s too early to know for sure.” Based on the history of prior techno-economic revolutions, the Trends editors strongly argue that this is “the real thing.”

Second, the biggest commercial winners in this “golden age” of surging productivity will be companies that emphasize innovation over optimization. There is an inevitable struggle in every company between the need to optimize the current business models and the need to innovate the next ones.

In its 2021 Global Leadership Study, Tata Consultancy Services found that executives of large companies are choosing innovation when considering where they compete (such as new sectors, regions or business models) and how they compete (such as creating new business processes). However, optimization takes priority when the questions are “what to compete with” and “how to lead.” On average, survey respondents indicate they will focus on optimizing existing products and services as well as existing talent management approaches rather developing new innovative solutions in those areas seems increasingly likely that the winners will deviate from the herd by focusing on real innovation in all these areas.

Third, as in prior techno-economic revolutions, consumers will gain far more than the innovators of the new technologies and business models. A research study by Nobel laureate and economist William Nordhaus (titled “Schumpeterian Profits in the American Economy: Theory and Measurement”) looked at who really gains from the value generated by innovation: the producer of the innovation or the consumer of the innovation.

In the words of Nordhaus, “We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.” And by “most,” he means almost all of the benefit; in fact, innovators were only “able to capture about 2.2 percent of the total social surplus from innovation.”

To see how that plays out in Corporate America, think about Jeff Bezos and Amazon. Although Bezos is worth some $200 billion, the company is worth more than 10 times that. Most of the value created by Jeff Bezos and Amazon doesn’t go to Jeff Bezos or even to Amazon’s other shareholders. As sketched out by the Amazon founder, the retailer created $300 billion of total value in 2020, with just 7 percent of that going to all of it shareholders. And since Bezos owns less than 10 percent of the shares, the value going to the Amazon founder last year works out to about $2 billion, which is less than 1 percent of total value created by Amazon. Employees, consumers and government received the rest.

Fourth, most of the real pay-off from remote workplace innovations will not show up in the official worker-productivity data. A recent study of work-from-home productivity from the University of Chicago cautions that only about 20% of the higher productivity from teleworking is likely to show up in the official productivity data because the conventional government statistics don’t take into account commute times. However, productivity in a broader sense will be enhanced more than anticipated as remote and distributed work circumvents the artificial constraints on real property utilization imposed by blue states. For example, workers once restricted to high-cost locations near New York City or Silicon Valley will transition to lower cost venues, improving their quality of life. Texas, Florida and Arizona are likely winners.

Fifth, as highlighted in prior Trends issues, higher productivity will alleviate inflationary pressures. Inflation was recently running at a 13-year high, with many Americans citing it as a big worry. Fortunately, productivity gains typically lead to lower prices even as more effective workers earn higher wages. The wave of inflation which hit the economy this year is primarily due to bottlenecks created by surging demand coming on the heels of pandemic-related retrenchment. As new technology and business models drive up productivity, inflation will abate. We can already see this pattern emerging in monthly inflation numbers.

And, Sixth, the innovation wave and productivity boom occurring during the deployment phase of the Fifth Techno-Economic Revolution will enable economic growth in spite of decelerating workforce growth. As baby boomers retire and population growth slows, there are simply fewer workers. Immigration helps somewhat, but the real solution involves productivity increases which yield a higher output per worker. As Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University puts it, “We are going to be short of young people.

So, all the tasks that were being done with the prior amount of the labor will have to be automated quite a bit. For instance, there won’t be that many drivers available for Uber or for garbage trucks, so autonomous vehicles will become crucial.”


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