Academic journal article National Institute Economic Review

Predicting Medium-Term Tfp Growth in the United States: Econometrics vs 'Techno-Optimism'

Academic journal article National Institute Economic Review

Predicting Medium-Term Tfp Growth in the United States: Econometrics vs 'Techno-Optimism'

Article excerpt

We analyse TFP growth in the US business sector using a basic unobserved component model where trend growth follows a random walk and the noise is a first order autoregression. This is fitted using a Kalman-filter methodology. We find that trend TFP growth has declined steadily from 1.5 to 1.0 per cent per year over the past 50 years. Nevertheless, recent trends are not a good guide to actual medium-term TFP growth. This exhibits substantial variations and is quite unpredictable. Techno-optimists should not give best to productivity pessimists simply because recent TFP growth has been weak.

Keywords: productivity slowdown, secular stagnation, TFP growth

I. Introduction

Technological change is the ultimate source of sustained growth of labour productivity and thus of longrun increases in living standards. In a conventional neoclassical growth model, it will be represented by the growth of total factor productivity (TFP). Growth accounting provides a methodology for estimating TFP growth and its contribution to labour productivity growth. Viewed from the perspective of this growth model, the growth accounting measure of the importance of TFP is an underestimate since the rate of growth of the capital stock is endogenous and, in the steady state, is equal to the exogenous natural rate of growth. Thus, a rise in the TFP growth rate induces capital accumulation and the steady-state rate of labour productivity growth is proportional to TFP growth. So, the TFP growth rate is a fundamental building block for projections of the rate of growth of potential output. In a world-leading economy (United States) this will be largely based on domestic innovative activity but in follower economies (Western Europe) there will be a significant contribution from technology transfer which exploits opportunities arising from TFP growth at the frontier.

The mainstream method of making such projections is by a more or less sophisticated extrapolation of recent performance. In other words, such methods embody a backward-looking perspective. As the heat of the ICT revolution has cooled and then been superseded by the financial crisis and its aftermath, these projections of future TFP growth have been revised downwards. An alternative, essentially forward-looking, approach is to try to evaluate the likely course of technological progress and its economic impact. At present, this gives a relatively wide range of future scenarios. On the upside, some commentators see a strong upturn in TFP growth based on the transformative scope of new technologies, such as artificial intelligence and robotics; on the downside, other voices say that the low-hanging fruit has all been picked or that the great inventions have already been made. Such punditry is, of course, notoriously difficult, as is epitomised by Robert Solow's 1987 remark that "you can see the computer age everywhere but in the productivity statistics".

The past few decades have seen big swings in expectations about future productivity growth, as the special century gave way to the productivity slowdown, which was followed by the new economy and then fears of secular stagnation. Revised beliefs about long-term future growth prospects have the potential to generate shocks to aggregate demand in the short term if they are reflected in changes in planned investment or consumption expenditure because, in classic Keynesian fashion, they impact upon the desired capital stock or permanent income.

In the light of this discussion, several questions arise which this paper addresses on the basis of time-series analysis. First, what has happened to trend TFP growth in the United States over time? Second, in past years, what would an econometric forecasting approach have predicted about future trend TFP growth? Third, how would these ex-ante forecasts have compared with estimates of trend TFP growth produced using data from the whole of the postwar period and with actual medium-term TFP growth performance in subsequent years? …

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