The End of the Productivity Slowdown

As computers improved and spread throughout the U.S. economy in 1970's and 1980's economists kept waiting to see the wonders of computing show through in national productivity. However it didn't happen. Productivity growth slowdown continued during the 1970s and 1980s. This surprising phenomenon came to be called 'the computer paradox' after Robert Solow's famous 1987 observation that: 'we see the computer age everywhere besides in the productivity statistics.

Since 1995 though productivity growth in the American economy has accelerated once again to a pace of 2.1% per year. Half a decade is a very short time on which to pin any long-run trend though there is certainly reason to hope that productivity slowdown has come to an end.

U.S. economy has benefited from a stunning investment boom since 1992. Between 1992 and 1998 real GDP rose by an average of 3.6% per year and business fixed investment soared at a 10.1% average rate--almost 3 times as fast. As a consequence share of business fixed investment in GDP jumped from 9.2% to 13.2% with much of the extra investment going into computers and related equipment. At least one major economic forecasting business attributes recent acceleration in productivity growth to this investment boom, a huge share of that is driven by rapidly-falling price of computers.

There is every reason to expect technological progress in computer and communications sectors to continue. In addition there is every reason to expect these useful technologies to continue to diffuse through the economy. So the best bet in forecasting future productivity growth is to project what has happened in past half-decade forward. If these projections are accurate then productivity slowdown has been brought to an end and its technological revolution in computers and communications that has done it.