Can Information Technology End the Productivity Slump and Revive the Economy?
AbstractTechnological innovation -- especially in information technology -- seems to be advancing faster than ever. But the U.S. is mired in a severe and prolonged productivity slowdown, which accounts for anemic economic growth and stagnant incomes over the last decade. What explains this seeming conflict? And what are the prospects for future growth? Some economists believe we have run out of ideas. Others think the globe suffers from a shortage of consumer demand, leading to "secular stagnation." Either way, they think we should expect another 25 years of disappointingly slow growth. I am much more optimistic. In new research, I show that productivity growth has indeed been rapid in the digital industries. Productivity in the physical industries, however, has plummeted and accounts for the overall slowdown. Moreover, the digital industries, which account for just a fifth of the economy, invest heavily in IT, while the physical industries, which account for four-fifths of the economy, substantially underinvest in IT. Four-fifths of the economy is thus operating well below its potential, dragging down growth and living standards. Fortunately, there are signs that the physical industries -- health care, transportation, energy, and manufacturing -- are poised for a transformation into information industries. Transforming the physical economy with information would add nearly a percentage point to annual economic growth over the next few decades, resulting in trillions of dollars in higher incomes and tax receipts.