The great productivity transient

This comment from Chris is interesting:

I would speculate that the the massive productivity gains were due to a massive resorting of American society along cognitive lines; from 1940 to 1970 a large number of high ability people who were previously locked into agriculture and industry were able to sort themselves into more innovative positions. This would lead to a massive burst of innovation, which led to increases in productivity, as previously unlocked talent was put to use.

From 1970 to 1990 this resorting was mostly winding down and productivity in the economy was heavily constrained by the population due to people still being necessary for most tasks and most of the potential innovation overhang being used up from 1940 to 1970.

Although computers were increasingly able to challenge people on some tasks during the 1970's, their effect was small (although increasingly noticeable in how long it took employment to rebound after recessions from 1980 on). From 1995 on productivity gains began to accelerate due to computers hitting a tipping point and their increasing ability to replace or augment people in areas across the economy.

Wages remain stagnant post-2000, because a growing number of people are being displaced at the lower levels of economic activity and competing for jobs that are ultimately constrained by the population, services (this would have happened earlier, but was masked by the initial burst of innovation following the cost of information falling to zero). Most of those displaced do not have the cognitive ability to perform economically useful innovation due to the sorting during the 1940-70 period and are unable to take advantage of the jobs on the high end of the income scale. An income gap forms and begins to accelerate.

There's a huge literature on this topic, so don't take the speculation here as the last word, but food for thought.

In Farewell to Alms Greg Clark asserts that the main beneficiaries of the regime of perpetual economic growth since 1800 have been the unskilled workers, who closed the wage gap with skilled workers up until 1970. At that point, the wage gap between the skilled and unskilled started to open up again. Also remember that though it is conventional wisdom to bemoan the increase in inequality in the modern capitalist economies, every civilized society before 1800 was far less egalitarian in the distribution of wealth and power than modern economies (in contrast to "savages," who had egalitarianism because of the lack of a very wealthy class; everyone was poor more or less).

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You use the increasing computer capabilities since 1980 to explain virtually every major economic event or trend for the last 30 years.

Prior to 1980's:
-Labor is crucial to all aspects of the economy. As the economy grows, it is bounded by how many people are available and newly created wealth is spent on labor. Technology almost always acts as a complement to labor.

Early 1980's recession
-Like previous recessions with one crucial difference, companies find that they are able to substitute computers in the place of human labor for a number of positions. The economy recovers, but the labor market takes noticeably longer. Companies find they have additional revenue to spend on capitol instead of labor

-Computers increase in capabilities and slow the growth of the labor market
-The cost of information has been decreasing for some time, but its decrease accelerates
-The lower cost of information allows an increasing number of entities into the media market, forcing individual entities to increasingly put a (consciously or not) slant on their information to capture parts of the market
-Traditional information sources begin losing customers to the new sources

Mid 90's
-Information cost reaches zero spurring a massive boost in economic innovation, particularly electronics and new information mediums and spurs one of the fastest economic expansions in American history
-The expansion is across all sectors of the economy and cannot but help taking labor with it, despite massive investments in technology
-A large number of companies are started with a crucial flaw - their business modal (if it exists) is predicated on information having a cost
-The amount of information available explodes, but the signal to noise ratio plummets due to the cost filter being removed. Good ideas and bad ideas spread too quickly for them to be evaluated effectively
-Traditional information sources continue to lose customers to new sources

-It becomes increasingly clear that the modals for many of the new companies created during the boom are untenable and investors rapidly flee
-Bubble pops, but most damage is in new industries and the recession is shallow
-Economy turns around quickly, but labor market recovery takes even longer than before due to massive productivity gains achieved through automation
-Investors and companies begin putting their capitol gained during the boom and through lower labor costs into âsafeâ investments, notably real estate

Mid 2000s
-Real estate values skyrocket as more and more capitol diverted to it
-Banks increasingly make loans on the expectation that incomes will increase substantially
-Massive amount of financial innovation as banks look for new ways to give and ensure credit
-Banks adopt new innovations without any idea of their efficacy to get ahead of their competitors
-Financial institutions issue and swap so much credit and assets that they lose track of who owns what
-People displaced from low skilled jobs by automation put significant downward pressure on the labor costs of the service sector
-The service industry takes advantage of the large amount of credit and low labor costs to massively expand their operations and overshoot demand
-Traditional information customer loss reaches a critical level and they begin attempting to reinvent themselves, but they are too late as other sources have already claimed their potential markets

-As the number of defaults grow in the real estate sector, it becomes increasingly clear that the income assumption is incorrect
-Investors flee from the sector and credit dries up, defaults skyrocket
-Financial institutions realize they have no idea what they actually own and that their assets donât cover the credit theyâve issued
-Financial institutions fail and the entire sector, the heart of the economy, is devastated
-Massive economic downturn as credit slows across the economy and plummeting demand causes companies to fail
-Burned during the real estate boom, surviving banks shy about issuing credit

In other words, I would suggest that we are in the early stages of a technological revolution on the scale of the industrial revolution over a much shorter period of time. THAT is why things seem so different compared to the rest of the 20th century.

Hmmm, did my first comment take or was it too long?

Chris: You write, "substitute computers in the place of human labor for a number of positions." Would not consideration of the fact that labor is indeed still part of the economy, but that it now is being utilized in places where it is much cheaper than the places where the goods are consumed? I would rewrite your algorithm to include something like, "inexpensive global transportation of goods produced in China and other cheap labor sites..." Of course, migration of unskilled labor, both legal and illegal, and information tech contribute to the evolving economic landscape as well. A big part of the key to globalization is very cheap petroleum. We have geology and engineering to thank for that. And, we could go on.

Indeed, globalization plays a roll (I erred in not including it), but not anywhere near to the extent people assume.

United States manufacturing output has more than doubled since 1980, but employment has seen a continuous decline from a peak of over 12 million employees just prior to 1980 to 7 million today:…

As you can see, 1980 looks like something of a discontinuity; labor grew almost continuously after 1945 (discount the World War II labor boom), but stalls a bit after the 1980 recession. It then recovered a bit, but not to the pre-1980 peak. It takes even longer to recover after 1990 and still doesn't make it to the 80's peak, even during the boom. It then proceeds to go off a cliff after 2000 (4 million in 10 years!!!).

Productivity gains have been across the economy, and a lot of the work performed in many jobs is comparable to that in manufacturing (repetitive work). Globalization cannot account for anywhere near enough of the decline.

Found what I was looking for, monthly change in goods (Normalized for 2002):

In consumer goods, production rose from 98.17 in Jan of 2000 to a high of 106.92 in Jan of 2008 before falling to 98.59 in Jan of 2009 (starts at 69.38 in Jan of 1986). So, while not doubling like electronics (goes from 93.88 in 2000 to 179.51 in 2008), American consumer good production has been slowly increasing (up until the recession).

Globalization can account for a low rate of industry growth, but not for the massive drop in its labor intensity.