How to Boost Productivity and Make It Last
(Bloomberg View) -- Economics pundits like me spend a good deal of time worrying about productivity. When discussing the issue, we often begin by noting that in the long run, productivity increases are the only way that living standards can improve. We recount the history of technological breakthroughs like the internal-combustion engine and the invention of electricity that supercharged productivity. And we wring our hands as productivity growth slows. Unless governments take steps to accelerate the pace of innovation and improve economic institutions, we warn, the human condition could stagnate.
We pundits are right to be concerned about slowing productivity growth. But we’re too careless in drawing an equivalence between growth today and wealth in the future. By assuming that more productivity today equals more tomorrow, we neglect the crucial idea of sustainability.
Suppose you’re an entrepreneur who can invest in either a gold mine or an online retail business. The gold mine will eventually run out, but the online retailer might grow indefinitely -- it’s more sustainable. Each may make the same profits in the first five years -- or the gold mine may even make more -- but 50 years down the line, there’s a better chance the online retailer will still be generating a profit.
Human technology is a bit analogous. If the world invests all of its resources in developing technologies that rely on scarce inputs like coal, productivity today won’t be matched by productivity a century or two from now. Coal reserves will begin to decline, and the costs of extraction will rise. Without a new energy source, peak coal will eventually send productivity growth toward zero, as it becomes prohibitively expensive to get the energy needed for the production of other goods and services. But if the world invests in a less scarce power source, like solar, there will be much less of a long-term limitation on energy production.
The coal option will look better for today’s productivity numbers, because coal is pretty cheap and easy to dig up and burn today, while solar panels and batteries are difficult things to invent and refine. But if we care about the productivity numbers 100 years from now, it’s a reason to invest more in solar today, even at the expense of current productivity.
This is one reason to be a little less worried about the productivity slowdown. The world's economies are shifting toward future productivity by investing in more sustainable technologies. The amount of output that can be produced for a given amount of energy has been increasing steadily. For the world, gross domestic product per kilogram of oil equivalent has more than doubled since 1990; for the U.S., the increase has been even larger.
That will help fossil fuel reserves last longer.
Even more importantly, the world has made substantial progress on technologies that replace fossil fuels entirely. A recent report by Bloomberg New Energy Finance shows just how rapid solar costs have declined. This graph shows the cost of solar panels as a function of total solar power capacity:
Batteries, which can store solar energy at night and power electric cars, have also been plunging in cost.
These technological changes don’t show up much in today’s productivity statistics. Productivity numbers measure how much output is produced today, not how much our technology will allow us to keep producing a century from now. The harnessing of oil power a century ago undoubtedly produced much greater immediate gains in productivity, since huge lakes of easily accessible oil could immediately be burned. Solar power, in contrast, reaches the Earth at a stately pace, so its impact will be modest today, but will continue for human eternity.
The benefits of sustainability might come sooner than people realize. The productivity slowdown that began in the 1970s is widely believed to have been a result of energy scarcity, due to the oil price shocks of that decade. Humanity had been enjoying cheaper and cheaper energy for two centuries before that, enabling first trains and steam ships, then cars and airplanes. When energy suddenly stopped getting cheaper, the old growth model stalled and productivity flat-lined. More recently, oil prices have fluctuated a lot, reaching record highs in 2008, before plunging 70 percent in the next year.
Renewable energy, on the other hand, probably won’t go into reverse. As long as the world doesn’t run out of the materials to collect and store the rays of the sun, this new energy source will only get cheaper.
Sustainability is also important, because the environment itself is a natural resource. Climate change, if left unchecked, will eventually harm human living standards. Though mitigating global warming doesn’t produce much in the way of productivity gains today, it allows the world to spend less on coping with climate change in the decades to come.
So while the productivity slowdown is troubling, the acceleration in sustainability is encouraging. The world’s old energy mix came with an expiration date; the new energy mix won’t. That should be cause for celebration.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
To contact the author of this story: Noah Smith at firstname.lastname@example.org.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.