Innovation is Still the Answer

In gloomy economic times such as these, we naturally look around for sources of blame. Former saviors make easy targets.

The tech boom of the late 1990s was great for the U.S. economy: GDP rose, unemployment dropped, and median incomes even made their most significant gains since the 1970s. Most people understood this success was due to new technology—and to information technology in particular—and they expected IT to be a main driver of the economy for years to come. Our bold New Economy had arrived, with all the convenience and style of America Online.

But the 2001 recession shook our faith in technology, and in the aftermath of the 2008 financial crisis many have turned on our would-be robotic saviors. Their disillusionment takes on the forms of disappointment, fear, or both.

The disappointed see our IT revolution, chock full of smartphones and big data, and ask, what good has it made in the real world? Recent technologies have changed our lives, certainly, but not with the productive power of previous advances. Instead: we order takeout via the internet instead of the phone; we watch YouTube at work in the time our Excel spreadsheet saved us. These changes may make life more pleasant, so goes the story, but if they fail to increase output per person, they fail to grow our economy.

Those who are fearful look at technologies still on the horizon and see powerful waves of creative destruction that could shock our economy into oblivion, or replace work as we know it. Computing power is still doubling and machines are getting smarter and more nimble. Human skills will be unable to keep up with automation, worker displacement will create economic upheaval, capital will reign supreme as labor becomes obsolete. Once the taxi drivers and the lawyers go, who will be next?

Despite the mutual contradiction in these arguments—either there is no productivity growth in which case there is no threat to jobs, or there is productivity growth and a supposed threat to jobs—there is some truth to both views: technological progress and the accompanying growth are neither inevitable nor inevitably equitable. But they miss reality. IT continues to drive growth and productivity, and its benefits to both workers and capital are clear.

Before the recession, IT was our main source of growth, responsible for 75 percent of U.S. productivity growth from 1995 to 2002, and 44 percent from 2000 to 2006. Overall, the internet is estimated to have created 2.6 jobs for every job lost, and those jobs are created because IT makes our companies more productive. From 2000 to 2009, for example, service-sector companies that used IT intensively grew jobs at a rate of 5.1 percent, while non-IT intensive service companies expanded jobs by only 1.5 percent.

During the business downturn overall growth has slowed, but the information technology sector has remained a consistent bright spot. Between May 2007 and May 2011, IT jobs increased by 6.8 percent, contributing $37 billion to an economy that was otherwise stagnant. And between 2006 and 2010, corporations that invested more in IT increased productivity three times as fast as corporations that invested less.

And while automation may increase in the future, there is simply no evidence or logic to suggest that it will lead to higher rates of unemployment: when technology makes work more efficient, it lowers prices—meaning more consumption elsewhere in the economy. Moreover, economic studies have not established a causal link between productivity and unemployment—in fact there is frequently no correlation whatsoever, or some studies argue that unemployment reduces innovation.

Those disappointed in technology, like Charles Kenny in a recent editorial for Bloomberg Businessweek, feel let down by the euphoria of the Nineties internet boom. No, IT did not and will not single-handedly turn our economy into a technological utopia. But it has greatly increased productivity in a range of sectors and continues to drive employment gains as well. As a general purpose technology, moreover, it will serve as the foundation for growth for years into the future.

Those apprehensive of technology, like McAfee and Brynjolfsson in their 2012 ebook, warn that growth from IT and other new technology holds dangers for the economy. While equity and employment issues should always be a concern, the poor state of our current labor market has little to do with technological progress.

On the contrary, innovation is essential for expanding productivity and living standards, and creating and maintaining the high value-added, tradable industries that have made the American economy strong. We our confident that innovation will continue to have big payoffs in the future.