Efficiency

Is Innovation Leading to a New Age of Productivity in the U.S.?


Is Innovation Leading to a New Age of Productivity in the U.S.?

At the Top Crop farm in Dwight, Ill., 200 wind turbines rise from a sea of corn and soybeans, their blades turning day and night to generate energy. The turbines monitor their own performance and each other’s with sensors. If one falls behind in meeting goals such as speed and ouput, it reaches out to an office about 850 miles away in Schenectady, N.Y., where General Electric’s (GE) remote operations center uses data from 19,000 windmills worldwide to find the most efficient way to help. Intelligent monitoring of the machines has helped GE fix faults, limit snags, and preempt thousands of failures.

So-called intelligent machines increasingly communicate among themselves and with people. Mobile devices allow round-the-clock interconnectivity. Computers crunch terabytes of data. Such innovations have convinced some economists that the stage is set for a wave of productivity gains to rival the one spawned by the 10-year Internet boom that began in 1995. “I’m quite optimistic,” says Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. Leaps in productivity would allow faster growth without generating higher inflation. Companies could pay their workers more while still enjoying healthier earnings. Rising tax revenue would make it easier for the U.S. to cut its budget deficit.

So far, the surge in efficiency is more forecast than fact. Employee output per hour rose 0.3 percent in the 12 months ended in June, one-tenth of the average 3 percent gain from 1995 to 2004, according to the U.S. Department of Labor. The meager advance buttresses the arguments of such pessimists as Robert Gordon, a professor of economics at Northwestern University who contends that innovation is faltering and that the U.S. is in for a long period of near stagnation. Michael Feroli, chief U.S. economist for JPMorgan Chase (JPM), says companies aren’t making the investments needed to boost efficiency. Adjusted for inflation, the supply of high-technology equipment and software in the economy rose at an annual rate of 3.1 percent from 2009 to 2011, down from 8.5 percent annually from 1984 to 2008.

Federal Reserve Chairman Ben Bernanke took issue with such gloomy projections in a May 18 commencement address at Bard College. “Pessimists may be paying too little attention to the strength of the underlying economic and social forces that generate innovation in the modern world,” he said. “The number of trained scientists and engineers is increasing rapidly, as are the resources for research provided by universities, governments, and the private sector.”

Daniel Sichel, an economics professor at Wellesley College, predicts this next stage in innovation could lift annual productivity gains to about 2.5 percent, compared to the 1.6 percent average over the last five years. “We are still near the starting line,” says Stephen Oliner, a resident scholar at the American Enterprise Institute. “Linking together existing technologies to create a new product takes a lot of work.”

History suggests that productivity gains come in cycles, University of Chicago economics professor Chad Syverson wrote in a paper earlier this year. That was the case with electrification around the turn of the last century, when the first installation of electrical devices drove a decade-long acceleration in productivity. That spurt was followed by a multiyear slowdown, then a subsequent speedup in efficiency. After the early easy advances, companies and consumers spent years learning how to exploit electricity to its fullest. “There are always lags between the introduction of new technologies and productivity gains,” MIT’s Brynjolfsson says. “In my papers, we found that companies that installed big, new enterprise information systems didn’t get the full benefits for five to seven years.”

Cisco Systems (CSCO), the world’s biggest maker of networking equipment, estimates that companies will generate much higher sales and profits and lower costs significantly. “There’s $14.4 trillion of value at stake in the next decade as we connect more things that drive productivity, that drive efficiency in the supply chain, that drive an expanded customer experience and revenue,” says Robert Lloyd, head of development and sales.

Brian Lillie, chief information officer of data center operator Equinix (EQIX), says his company has already realized some of the promise of the new productivity. “My sales guys have access to data constantly,” he says. “My engineers have access to technical data all the time. I can be coaching baseball and doing work on my phone. I’m not saying whether that’s good or not, but I know I’m a hell of a lot more productive than I used to be.”

The bottom line: New productivity gains could hike revenue and lower costs by $14.4 trillion over the next decade, says Cisco.

Chandra is a reporter for Bloomberg News in Washington.
Miller is a reporter for Bloomberg News in Washington.
Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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