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The productivity paradox: Why we're getting more innovation but less growth...

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The productivity paradox:

It seems like the United States economy is enjoying more innovation than ever before. At the same time, statistics show the economy suffering from its slowest growth in decades.

Analysts often try to resolve this by arguing either that conventional statistics aren’t properly measuring the value of innovation or else that the apparent speed-up in innovation is actually an illusion and progress is slowing down. Another possibility is that things are exactly as they seem: Rapid technological innovation is real, and so is slow economic growth. In fact, in a sense the innovation is causing the slow growth. 

Call it the productivity paradox, and recognize that it explains a lot about the current state and the future direction of the American economy.

Actually, there's a good reason why:

Most of the progress in recent decades has involved making cheaper and more convenient versions of products that already existed. Phone calls and photographs, for example, have been around for a long time, but over the past 20 years we’ve seen a revolutionary decline in the cost and massive increase in the convenience of snapping photos or making long-distance calls.

As innovation has pushed down the cost of certain types of products (mostly durable goods such as televisions, furniture, and clothing), Americans have used the savings to spend more on other things — especially education, health care, child care, and housing — where productivity growth has been much slower.

Over time, low-productivity sectors have become a larger share of the economy, while high-productivity goods production has become a smaller share. And an economy dominated by industries with low productivity growth is going to grow slowly.


Slow growth sounds bad, but the future implied by the productivity paradox isn’t actually so terrible. It means that in the future a small minority of people will produce the world’s material goods and automated services, while the rest of us are focused on providing personalized services to each other. It’s a future of material abundance and plentiful jobs.

Indeed, one way to think about it is that middle-class Americans are getting close to enjoying as much material comfort and convenience as it’s possible for any society to provide for ordinary people. Accumulating even more stuff isn’t going to make us much happier, so we’re devoting more and more of our incomes to personal services that don’t see rapid productivity growth but do a lot to make our lives better.

Human labor is a luxury good.

In 2012, the Wall Street Journal reported that “Starbucks baristas are being told to stop making multiple drinks at the same time” as a result of “customer complaints that the Seattle-based coffee chain has reduced the fine art of coffee making to a mechanized process with all the romance of an assembly line.”

A Starbucks barista in Minnesota griped that the new rules had "doubled the amount of time it takes to make drinks in some cases."

People don't go to Starbucks simply to get a cup of coffee — after all, there are lots of cheaper and faster ways to get a cup of joe. People go to Starbucks because they want a cup of coffee and the “romance” that comes from getting personal service from a human being.

This means that even if Starbucks invented a vending machine or robot that could make and sell coffee as well as a human barista, it wouldn’t make sense for Starbucks to lay off its human workers. Baristas aren’t just an expensive way for people to get the coffee they want; they’re essential to Starbucks’s strategy for distinguishing itself from lower-cost options like making coffee at home or the office or buying it from McDonald’s or Dunkin’ Donuts.

A lot of other service industries work the same way:

  • Downscale restaurants often make customers order at a counter and bus their own trays. Fancy restaurants hire people to take orders, refill water glasses, take people’s coats, and so forth.
  • Wealthy customers tend go to in-person fitness classes (or even hire a personal trainer), while more frugal customers buy exercise videos they can watch at home.
  • ATMs have proliferated over the past 30 years, yet banks still keep human tellers on hand to answer customer questions and sell more profitable banking services.
  • Amazon offers a fast, cheap, and convenient impersonal shopping experience, yet boutique shops and farmers markets have proliferated.
  • TurboTax provides automated tax preparation services. But most people prefer a human tax preparer who can answer questions, provide advice, and spot opportunities for saving money the software might have missed.
  • The startup Redfin tried to save real estate customers money by automating much of the home-buying process. But customers hated this early, barebones product because they actually wanted to talk to a human real estate agent. So over time Redfin has been forced to raise its prices, hire more agents, and become a lot more like a conventional realtor.

Automation treats human labor as a cost to be reduced or eliminated. But this attitude misunderstands the value of the human workers in these industries. The opportunity to interact with other human beings is a big selling point for fancy restaurants, farmers markets, and in-person fitness classes.

If we ever figure out how to automate aspects of education, health care, or other major labor-intensive industries, something similar is likely to happen.

The future will have plenty of jobs.

At this point, it should also be clear why I think people are mistaken when they predict that automation will lead to a jobless future. Automation will certainly eliminate many jobs, just as it has done for the past 200 years. And some economists worry that the premature decline of manufacturing in developing countries will stunt their long-term growth. But a wealthy society has a basically unlimited demand for workers to provide personal services.

Most parents would like to send their young kids to day care options with fewer children per adult, and their older children to schools with smaller class sizes. People would like to provide their elderly parents with better elder care services with more human interaction.

People would like their doctors to have more time to talk to them. They’d like to go out to more fancy dinners and take vacations at fancier resorts. They’d like to have personal fitness instructors and life coaches. They’d like to go to more concerts, plays, and comedy clubs. They’d like to have people renovate their kitchens and bathrooms.

Demand for these services will always outstrip supply because each worker only has about 2,000 hours of work to offer to the market each year, and there’s a lot more than 2,000 hours of work each of us would like to have other people do for us. Most of us can’t afford all the human services we’d like to consume, so we buy a Roomba instead of hiring cleaners, buy frozen dinners instead of eating out, and so forth. But if automation made us richer, we’d spend more on these services and employ more people as a result.

In 1930, the economist John Maynard Keynes wrote a famous essay called “Economic Possibilities for our Grandchildren,” in which he speculated that the workweek could continue falling to 15 hours over the next century.

It doesn’t look like that’s going to happen, and our demand for personal services helps to explain why. Americans with above-average incomes could work a lot less and still support their families. A blogger named Mr. Money Mustache brags about how he retired at age 30 after living frugally as a software engineer during his 20s. Lots more people could do this if they really wanted to.

But most of us don’t want to. We’d rather work more and enjoy more luxuries. And while luxuries can take a variety of forms — with expensive housing being a big one in coastal cities — the most expensive ones are increasingly the ones that are the most labor-intensive.

So I think the future will look like the present — but even more so. A tiny minority of the population will produce the world’s clothing, smartphones, cars, household appliances, and other material goods. Almost everyone will work providing each other with personalized services — and these services will consume a growing share of our incomes.

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