The last time the United States economy was posting surprising economic growth numbers amid rapid wage gains and moderating inflation, Ace of Base and All-4-One topped the Billboard charts and denim overalls were in vogue.

Thirty years ago, officials at the US Federal Reserve were hotly debating whether the economy could continue to chug along so vigorously without spurring a pickup in inflation. And back in 1994, it turned out that it could, thanks to one key ingredient: productivity.

Now, official productivity data is showing a big pickup for the first time in years. The data has been volatile since the start of the Covid-19 pandemic, but with the dawn of new technologies like artificial intelligence and the embrace of hybrid work set-ups, some economists are asking whether the recent gains might be real – and whether they can turn into a lasting boom.

If the answer is yes, it would have huge implications for the US economy. Improved productivity would mean that companies could create more product per worker. And a steady pickup in productivity could allow the economy to take off in a healthy way. More productive companies are able to pay better wages without having to raise prices or sacrifice profits.

Several of the trends in place today have parallels with what was happening in 1994 – but the differences explain why many economists are not ready to declare a turning point just yet.

The Computer Age v the Zoom Age

By the end of the 1980s, computers had been around for decades but had not yet generated big gains to productivity – what has come to be known as the productivity paradox. Economist Robert Solow famously said in 1987: “You can see the computer age everywhere but in the productivity statistics.”

That changed by the middle of the 1990s, as semiconductor manufacturing improved and computers became cheaper. Businesses began to learn how to invest in information technology, and it helped productivity to boom.

For years, economists and analysts have questioned whether we might be experiencing a new productivity paradox: Despite our sudden access to cloud computing, rapid Internet connections and mobile phones, productivity gains were tepid in the late 2000s and throughout the 2010s.

Since 2020, companies have learnt how to leverage existing digital tools in new ways as employees shifted towards remote work. Will that cause lasting efficiency improvements in some sectors?

So far, whether remote work is good or bad for productivity remains hotly debated, as a recent paper by Professor Nicholas Bloom at Stanford and other researchers explained. Early research has suggested that employees may be less efficient when they are totally remote, and that hybrid work leads to small, if any, productivity gains.

But workers who are saving commuting and grooming time often feel more productive – even if that saved time is not captured in official productivity data.

“The studies probably understate the effect,” Prof Bloom said, explaining that employees who are happier thanks to job flexibility may be less likely to quit – helping companies to avoid unproductive retraining.

Remote work could also allow firms to move more “tedious” jobs abroad, he thinks, shuffling Americans towards more dynamic work.

“The aggregate story is potentially pretty powerful,” he said in an interview, predicting that remote work is midway through unleashing a decade-long productivity boom. “We’re in a brave new world: It’s going to take years.”

The Internet v Artificial Intelligence

In the 1990s, the World Wide Web was coming into widespread use. Companies initially fretted that it might sidetrack their workers. (“Oh, what a tangled web, this Internet,” a 1995 article in The New York Times sighed about online distractions.) But the tools ultimately streamlined many types of work.

One retrospective on the 1990s boom found that a combination of efficient computer manufacturing and increased information technology use accounted for about two-thirds of the era’s productivity pickup.

Today’s shiny new technology equivalent is artificial intelligence. While many economists said it was probably too early to see the benefits of AI showing through in full force, some proponents think it could prove transformative by automating mental tasks, including proposal writing and e-mails.

“There’s a lot more to come as more people adopt these things,” said Dr Erik Brynjolfsson, an economist at Stanford University who is optimistic that we may be on the cusp of a productivity take-off as white-collar workers have their day-to-day abilities augmented by the new tools.

He has been running experiments and finding that AI does help workers, and has co-founded a company that coaches firms on how to best employ the technology.

But Professor Robert Gordon, a leading productivity-focused economist at Northwestern University, is sceptical. He said that unlike with the computer and early Internet age, AI’s biggest impacts may be in office work – whereas computer manufacturing also became more efficient in the 1990s, allowing for gains across several sectors.

“I don’t see the universality of AI sweeping through the economy with that multi-industry impact,” Prof Gordon said.

Walmart v Internet Shopping

Another driver of the 1990s productivity boom? Companies were making big logistical improvements. Walmart grew rapidly during the decade, bringing with it strong supply chain management that allowed it to efficiently stock shelves with cheap products from around the world. Distribution, notably in pharmaceuticals, also improved.

One possible challenge is that such gains are hard to win twice: Now that companies have become more efficient, it may be difficult for them to improve drastically. Online shopping continued to revolutionise retail in the 2010s, for instance, but both industry and overall productivity gains were modest.

That underlines an important point about productivity growth. It’s easy to pick low-hanging fruit, like optimising supply chains using software. Once that has been done, it can become harder to make gains. The economy ends up with higher productivity levels, but not necessarily sustained high productivity growth.

Entrepreneurship Booms

What can lead to lasting productivity gains is a burst of innovation that feeds on itself – and that makes the recent uptick in business formation a hopeful sign. New businesses are often more inventive.

Back in 1994, many businesses were formed as people tried to capitalise on breakthroughs in information technology.

Today, business applications have been surging again, probably the result of people deciding to strike out on their own after losing or quitting jobs amid the pandemic.

The new business bump could simply reflect that people were reshuffling to at-home work, recent research by Fed economist Ryan Decker and Professor John Haltiwanger of the University of Maryland has suggested.

But many of the new companies are in potentially productivity-spurring fields including online retailing, software publishing, computer systems design, and research and development services.

Two Inflation Comedowns

The 1990s and the 2020s have another possible productivity booster in common: slipping pricing power.

Inflation had been cooling for years by the mid-1990s, and Fed officials noted at their meetings that companies were losing their ability to continue to raise prices without losing customers. To keep profits from collapsing, companies had to figure out how to be more efficient.

“Of necessity we will tend to get an increase in productivity because it is being forced on the system,” Dr Alan Greenspan, then the Fed chair, theorised during one Fed meeting.

Inflation is also coming down today. And the job market was strong back then and is now – meaning companies have had to pay up to attract workers. When wages are rising faster than prices, firms must stretch their workers further if they hope to maintain their profits.

Alan Greenspan v Jerome Powell

By 1996, Dr Greenspan was becoming convinced that productivity was on the rise – so he persuaded his colleagues that they did not need to try to slow down the economy so much. With productivity improving, strong growth was less likely to cause inflation.

Mr Jerome Powell, the current Fed chair, has praised Dr Greenspan’s “fortitude” and foresight in navigating that period.

It may be a lesson he can draw on in the months ahead. Growth remains stronger than Fed officials had expected, and policymakers will need to decide whether to react by keeping interest rates higher for longer.

For now, Mr Powell is unconvinced that the US is in a new productivity boom.

“My guess is that we may shake out and be back where we were,” he said during a Jan 31 news conference. But, he acknowledged: “I don’t know.”

Insead Business School economist John Fernald noted that in the 1990s, it took until 1999 for economists to really believe that productivity had taken off.

So while hope is now glimmering, confidence could be years away.
NYTIMES