In 2015, Jan Hatzis, the Chief Economist at Goldman Sachs Group Inc., had used the Grand Theft Auto case study to explain the mystery of sluggish growth in productivity in the world’s most developed economy.
As per Bloomberg news, labor productivity growth hovered around 0.5% to 1 % in the U.S., U.K., and Eurozone since the 2008 financial crisis. This was far below the long-term average and contributed to slower economic growth.
This was in contrast and at odds with the boom that the digital sector saw during the same period, reflected in big tech companies such as Facebook Inc., Google, and Apple Inc. Share prices.
To explain the mystery in this discrepancy, Economist Hatzius and his team put forth an argument that statisticians have not been able to find a way to measure the incremental growth in business that included Streaming software, content, and video games. This meant that the developments in these sectors were not captured in the economic figures the way it was done for hardware in the 1990s.
The calculations to measure growth from 2D to 3D were challenging. It was easier to measure memory and processing power that characterized the I.T. boom in the 1990s.
Goldman Sachs is setting aside its thesis, which is data-driven and looking forward six years down the line. It has spelled out three reasons why productivity is expected to see a big boom.
The first reason which Goldman is arguing is that productivity based on various factors moves up and down in cycles, and mean reversion will ensure that productivity, which has gone down and up during the financial crisis and boom period, is again on its way up.
The U.S. TFP (total factor productivity) growth was stationary over a longer-term horizon and with a 1.2% annual growth rate on an average over cycles of strength and weakness. This meant that TFP, which saw rock bottom is likely to stage a recovery, and further acceleration in productivity levels is consistent with historical means.
The second reason is the acceleration of technology which Goldman sees as an investment in IPP (Intellectual Property products). This means that one can see the second wave of the IT revolution with AI and more advanced technology incorporated in business models. As the investments show the result, productivity should pick up. There is evidence that technological acceleration has picked up, and IPP started to rise in 2020 before the pandemic.
The third reason is attributed to the creative destruction, which gave rise to economic dynamism. The pandemic, which created havoc globally, also provided many opportunities for entrepreneurs to open new businesses.
New business applications increased in the second half of 2020 in the U.S., and Germany and France also rose in new business formation, but it was less dramatic. Economic research shows that a rise in entrepreneurship often boosts productivity. They are an essential source of innovation-driven growth in TFP.
If the three assumptions are correct, then a boost in productivity also means higher interest rates.
