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The Fed's Roger W. Ferguson speculates on the sustainability of recent high productivity growth. Ferguson and William Wascher's article on the subject just appeared in the Journal of Economic Perspectives. The article says,

Productivity booms seem to involve four key ingredients: technological innovation; the willingness and ability of owners and corporate managers to reengineer the internal organization of their firms to take maximum advantage of those innovations; financial sector innovations tailored to the forms of business organization predominating at the time; and a skilled and flexible workforce.

Ferguson and Wascher point out that previous productivity booms have come to an end, in part because innovations became "played out." I wonder whether we have reached a point where fundamental innovations are following on one another so rapidly that we might not have an interruption to the productivity boom. Perhaps nanotechnology and biotechnology will take off before the computer and communications revolution based on Moore's Law wears out.

For Discussion. What factors will determine whether the productivity boom continues?

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COMMENTS (4 to date)
Bernard Guerrero writes:

"What factors will determine whether the productivity boom continues?"

Some ideas...

A) Rapidity of consumer adjustment: People's
tastes and expectations don't change overnight. You can invent a way to produce a solid car at 1/5 the current cost, but that doesn't mean that folks will suddenly start buying 5 cars where hey would have bought 1. If the goods in question have fairly "sticky" demand, pressure to adopt the latest production technology might not pass muster as an investment decision.

B) Rapidity of Labor Pool adjustment: The folks displaced by earlier productivity enhancements within a given field may or may not move on to greener pastures. If they quickly move on to other areas of lower relative productivity, the industry in question will be primed once again for a round of further productivity enhancements (particularly if the leaner cost structure from the first round startes to trickle down to the consumer and stimulate further demand.) If not, they may be available when demand ramps up and the industry may ramp up production by rehiring.

Pace of innovation at the consumer level: Saturated markets are subject to price competition, but the business decision to invest in new technology is more difficult in a declining-price environment. New products that start out being produced at a "cottage" level and then see rapid leaps in consumer demand, on the other hand, cry out for investment in productivity enhancements.

Lawrance George Lux writes:

The Productivity growth boomers always like to tout the huge gains, ascribing such ratios to various elements. I always asked why high Productivity gains come with paring down Business Inventories, and shrink with expanding Inventories. There are Productivity Gains per se, at rates of about two percent per year since 1937. This rate, though, seems fairly stable. lgl

Dmytri Kleiner writes:

As far as I can tell, all you need to do is look at the trade balance of payments to see that US productivity relative to consumption is dangoursly low, it is only the novel mathematics that ignore foreign inputs that makes it look otherwise.

As has been mentioned on this board several times, the productivity gains seem to be pretty much a factor of increased output relative to domestic labour caused by increased dependence on foreign inputs.

In otherwords, you can thank Asia for this productivity boom, just like you can thank the huge Asian US Dollar reserves for this reduction of domestic productivity relative to domestic consumption not resulting in massive inflation.

Before celebrating this increase in productivity, I would like to know what happens when Asian central banks stop financing US consumption, or worse when the US dollars trapped in foreign reserves start to come home, making inflationary demands on US productivity?

Hugh Jarse writes:

Another factor is terrorist plans to destroy the United States and, if their plans succeed. If yes, well, no more productivity.

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