Productivity growth takes center stage in economic discourse - Fed’s Goolsbee

Investing.com -- Austan Goolsbee, President and CEO of the Federal Reserve Bank of Chicago, offered prepared remarks of a speech he will be giving tonight at the 2025 SIEPR Economic Summit at Stanford University, in which the importance of productivity growth are highlighted. Goolsbee stressed that productivity growth is a significant determinant of living standards, and its recent trends have sparked interest among economists.

Over the past two years, productivity growth has been faster than the trend observed in the 11 years before the Covid-19 pandemic. This increase has led economists to explore potential explanations. Four theories have been proposed, three of which suggest that the surge in productivity growth may not continue.

The first theory is that the rise in work-from-home flexibility has led to a one-time boost in productivity. The second explanation is the concept of "labor reallocation and increased match quality," suggesting that the Great Resignation allowed people to find jobs better suited to their skills, resulting in a one-time increase in productivity. The third theory attributes the productivity surge to entrepreneurial dynamism, as the number of startups increased at the onset of Covid-19 and hasn’t decreased since.

The final theory, and the one that differs from the rest, suggests that the boom in productivity has been driven by technology and AI. While there is skepticism due to lack of widespread adoption, if this theory holds, it could lead to sustained productivity growth rather than a one-time increase.

Goolsbee pointed out that if this surge in productivity growth is the result of new technology, it could continue to spread through the economy. He referenced the work of Paul David, an economic historian who studied the evolution of innovations known as general-purpose technologies, such as electricity, telephones, and computers. These technologies initially boosted productivity in their respective sectors before spreading to other industries.

Researchers at the Federal Reserve Bank of Chicago analyzed productivity numbers of every U.S. industry, ranking them according to whose productivity growth increased the most. They found that the industries experiencing the most significant productivity surge were those associated with technology or AI, such as internet publishing, e-commerce, and computer system design.

However, Goolsbee warned that anticipation of a productivity surge could lead to a massive investment boom in AI-related businesses, potentially overheating the economy. He pointed out the need to balance the risks that can come from getting too far ahead of reality, citing the lessons from 2001 when the excitement over internet growth led to massive run-ups in equity values and increases in internet-related capital investment, which eventually resulted in a recession.

Goolsbee concluded by emphasizing the challenge of determining whether the surge in productivity growth will continue while avoiding the trap of excessive anticipation. He stressed the need to incorporate perspectives from industry experts and business leaders, but also to maintain grounded expectations to avoid overshooting the target.

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