54: The Optimist's Guide to the Economy

get to work today? Did you come in a driverless car? I came to work, Scott, in a very drive of full car. It was a green taxi that I hailed close to my apartment in Brooklyn. I had to repeat where I was going three times, including the part about fifty eight. There's just something about the Aussi accent that didn't gel well. I feel for you, Dan, I didn't have a driverless car too. I still have my two thousand Honda occurred getting getting me where I need to go.

So we're not quite there yet, but our next guest might have something to say about the direction the technology is going and how it's going to impact our society. Two weeks ago, we had on Robert Gordon, the economics professor at Northwestern who believes that the best days of American growth are behind us because we've already had the kinds of inventions that truly changed our world, like indoor

plumbing and electricity. And joining us now is Eric Brynjolfson, who is a professor at Massachusetts Institute of Technology and director of its Initiative on the Digital Economy, and co author of the book The Second Machine Age Now. The subtitle of that book sets it up as a counterpoint of Professor gordon work progress and prosperity in a time of brilliant technologies. The author is not under selling it. We'll get to that in a second. Eric. Thank you

for joining us. It's great to be with both. Dannon's got now. Eric, it's been three years since you debated Gordon at a TED talk and we're still stuck in this rut of weak productivity. America is having trouble breaking out of this two percent growth, and more and more economists seemed to be coming around to the view that maybe we are in a low growth era, that maybe Larry Summers has a point after he's harped on the

idea of secular stagnation for the last few years. Has your optimism been dimmed at all by these kinds of developments? Not really, And I'll tell you why. I mean. First, I want to say that I very much enjoyed having these discussions with Bob Gordon. We're friends going way back, and UH, I loved his book. I thought it was brilliant.

I agree with about nine of it. The part we disagree with, the part that people love to talk about, which maybe is the most important part, is not what happened in the past, but what's likely to happen in the future. And UH, Bob takes some of the pessimism of the of the recent past, the low productivity that we've had in the past decade or so, and UH uses it to bolsters argument that the best days are behind us, and UH, as Larry Summers and others who pointed out we have been in a low growth era

for some time. However, I think much better days are ahead of us. And my optimism comes not from extrapolating what happened with productivity recently. It comes from going out and visiting companies UM in particular, I think we should remember that this is not the first time people talked about secular stagnation. The term was actually coined by Alvin Hanson back in the nineteen thirties, another really bad period for growth, and he basically said, as Bob Gordon says today,

that the great inventions were all behind us. People were depressed. He pointed out that there wasn't more land that we could take advantage of. Population growth was slowing and ran through some great inventions that you know, had already been discovered, and didn't think of any new ones ahead of us. Well, in Alvin Hanson's case, it turned out that he was a hundred eighty degrees wrong. Literally, the best three decades

we've ever had so far, we're right. After Alvin promulgated the idea of secular stagnation, the forties, fifties, and sixties were just blockbuster decades for growth and productivity. And I think we should take that as as a warning and be a little humble about what we think will be going what will happen going forward. Productivity is really what drives living standards more than population growth or any the

other uh factors, and productivity is inherently unpredictable. Economists sometimes call it a measure of our ignorance, because it's the residual that's left over after you account for all the things that you can measure, like labor and capital. So both in theory and in practice, it's it's very hard to predict productivity. After I debated Bob Gordon, I did

a little exercise. I took all the ten year periods we have on record and compared the productivity growth in one ten year period to the productivity growth in the next ten year period. And guess what the correlation was from one decade to the next. There is none. Yeah, that's right, there was absolutely none. Um. You know, sometimes you had much better decades, like after Alvin Hansen's discussion of secondar stagnation. Sometimes you had correlation, but on average

it turned out to be a big zero. And uh so, just saying hey, we've had some bad years, ergo it's going to keep getting bad. That that doesn't have much empirical support or, as I said, theoretical support. So Eric, how has all this escaped or sailed below the popular economic narrative where best with the use of terms like new normal quote unquote slow recovery quote unquote wageless recovery. This all seems at odds with what we're hearing a lot of at the moment. Can you explain that? Well,

it depends who you talk to. And there's no question we've had some very low growth, both in productivity and overall economic growth, and I think that's legitimate to point out. And there's a lot of things we can do in the to compact some of the cyclical problems we've been having. I think people still underestimate the scale and scope of the Great Recession and the cyclical factors that are still

slowing us down. Um So I wouldn't belittle those concerns, but I also wouldn't use them to extrapolate into what's happening with technological progress. That's a whole different ballgame. Technological progress. It's very different from the underutilization of labor and capital

in the economy. If you, understan want to understand what's going on with technological progress, you need to talk to technologists, and I spend a lot of time doing that in places like Silicon Valley and of course here at at M I T and UH, maybe it's just escaped the popular discourse in some parts of the country. But among technologists UH, people are very optimistic. People like Bill Gates

say that the innovation has never been faster. I was just back from a two week visit to UH, to Silicon Valley, meeting with a lot of the tech leaders, and and they continue to be very, very optimistic, and they feel like there are some great things that they are making investments in. And I think if you look at the broader market, it's also pretty bullish on technology. Um, what are the five most valuable companies in America? Well,

they're all tech companies. They are Apple, alphabet or Google, Facebook, Microsoft, and Amazon. These are tech companies and their sales are growing rapidly. Their profits are enormous, the biggest in history. And investors must be very bullish because they are putting their their valuations at pretty decent levels. So that suggests to me that maybe inside the Beltway or in other places, people aren't optimistic about technology. But I hear a different

story when I visit technologists. So is there any single invention that you see out there or a couple inventions that that could really change the world? You know, you talk a lot about driverless cars, artificial intelligence, three D printing, things like that in your in your book. Are things like that going to really boost productivity or do we have to think of a combination of these inventions like you talked about as well. I think it's both some

core technologies and the recombination of these technologies. And if I were forced to say the ones that are most excited about right now, I would have to say the broad cluster of artificial intelligence, particularly what I sometimes called the second wave of the second machine age, which is this ability for machines to learn on their own how to solve problems using neural nets, deep learning, reinforcement learning,

and that is what's enabling some of these inventions. You talked about driverless cars, and we featured them at the beginning of our book, and some people kind of made fun of us for being very science fiction e back in. But they're happening even faster than we predicted that for that matter, faster than I think most of the technologists even predicted. UM Singapore is rolling up driverless taxis actually rolled them out last week using some M I T technology.

Uber has some driverless cars in Pittsburgh this month. And they still have a human sitting in the front seat just to kind of keep an eye on it. But the technology is happening pretty rapidly, and that's driven by these machine learning systems that have vastly improved vision. When we wrote the book, humans could see better than machines. Now in many tasks, machines are much better, for instance, that recognizing street signs or uh interpreting images in a

big databases like image net. The same technology is vastly improved voice recognition, and even in mundane things that we don't hear that much about, like power use in data centers. Google's deep Mind team, a group of AI researchers turned their technology on their own data centers and very quickly found that they were able to run them more efficiently. Um,

they're working to diagnose diseases better. So what we're doing is taking this core technology of artificial intelligence machine learning and combining it with knowledge and lots of different areas to create new products and services. Eric, I'm glad you

mentioned the belt White a little while ago. The sort of technological advances that you're talking about saying to be running parallel to or transcending the political process Is there anything that could go wrong or right with this essentially optimistic view after the election? Oh very much so. I can see a lot of ways this can go wrong. You know, technology is a catalyst for bigger changes, but

by itself, technology doesn't raise living standards. It requires a host of complementary innovations, just as it did in the Industrial Revolution, investments in education, reorganization of work, new policies. I don't see as being nearly as good at those complementary innovations or nearly as fast at those complementary innovations as we have been in the core technologies, and the

political system doesn't give me a lot of optimism. And that's the part that, if anything, I'm more depressed about than it was in the past. And that shows up in some really alarming statistics that we highlighted in the our and and I highlighted in our book the second machine age UM like the stagnation of median income. It's bumped up a little bit the past year, but it's still lower now, significantly lower now than it was back

in the year two thousand. UM that income at the fiftie percentile, overall income of the economy, overall GDP per person is higher, much higher than it was. So how is that possible that median income is lower. Well, that's because it's become more unequal. There are a lot of people who have jobs, a lot of particularly routine information processing jobs that aren't as much in demand as they

were a decade or two ago. Um. There's a variety of reasons for that, but one of the most important ones is the machines can do a lot of those jobs better, like travel agents or routine tax preparation, or just a lot of clerks and middle managers that used to shuffle a lot of paper. Machines are getting really good at that, reading legal documents, etcetera. That's a concern, and we need to rethink our policies, retrain people, boost

entrepreneurship to help invent new goods and services. Uh and and people need to work harder at their own skills and educate themselves so that they'll be more prepared for the kinds of jobs that machines don't do as well. That does, is that what you're trying to do with this competition inclusive innovation. Thanks for mentioning that, so you know, we don't want to just talk about it UM and

research it. We wanted to take an active role. So here at M I t A, we've got a research center called the Initiative on the Digital Economy, and we've launched an inclusive innovation competition to recognize and reward the companies that are doing what I just described, that are using technology to involve more people in the workforce to create more shared prosperity. I've been reviewing those applications along

with an all star lineup of judges. That is a cause for optimism because there are just so many amazing entrepreneurs, social entrepreneurs and for profit entrepreneurs and people working with labor and with technology that are in the process of reinventing our economy. So that's what we need to see more of. We need to encourage it UM. Sadly, broadly speaking,

entrepreneurship has not been keeping up with technology. Uh. Great work by Halta Wanger and Steve Davis and others has pointed out that we haven't had as dynamic economy as we used to have, so so that that would be where I want to work harder. And UH, if we do that, I think median incomes will recover Now that that brings us to a related issue, which is the government's role in all of this. Paul Krugman, for example, who you said in your book is a fan of

government borrowing at low interest rates for infrastructure. There's also an issue with government support for R and D. What role does the government play in the Second Machine Age? Yeah, you know, I think there's too many people who try to make it in either or either the government does or the private sector. I think it's got to be a both and Um, the government has an absolutely essential role in basic R and D helping set standards, provide

the basic infrastructure. The Internet itself started as a government project, and so on top of that, there was a bunch of companies that made billions of dollars making the Internet more relevant to consumers and more useful for businesses. I think we've got to continue that spirit of government focusing on basic R and D and infrastructure and also boosting education and then making it easier for companies to build on that foundation to create wealth. Much of the Second

Machine Age appears sensitor around the United States. How has America placed relative to other lodge economies in this next golden era of tech and productivity. I think one of the advantage of the United States has is it's encouraged a lot of the kinds of entrepreneurship, not as much as it should or could, but still it's encouraged it in a way that a lot of other countries haven't. It had a relatively well educated workforce and one that has a lot of creativity. But this is not really

one nation versus another nation kind of question. These innovations are largely boundary lists and I just just back from Helsinki, where there's some amazing people working at companies like super Cell, creating billions of dollars of value with just a handful of engineers. Um Stockholm is another example. Amazing things happening in London, in Tokyo, in Shenzang, in Bangalore. If you're bright, and you have an idea and you have access to the Internet, you can reach a billion people and do

amazing things in the way you couldn't have previously. This is a very new era. I had an undergraduate student who wrote a little app. He said he took him a few weeks, and uh, in a few months he had a million users. That's something that wouldn't have happened ten or twenty years ago, and it really has lowered the boundaries to innovation quite a bit, and we all stand to gain from it, regardless of where those in leaders are located. But it sounds like you're definitely not

a US declinist. No, I mean it's not. And again it's not the US versus other countries. I'm pretty optimistic because I see such amazing technologies in the pipeline. I'm concerned because it's not automatic that those technologies are going to benefit everybody, or benefit people more broadly. So I'd like to see the U, S and other countries work towards shared prosperity. But I don't see it as a contest between one country or another. I see it as

a contest between good policies and bad policies worldwide. It's about to tell you about a real life technological challenge he faced on the weekend with his car. That's right. A few days ago, my car's battery died while I was out with my family. Um, you know this might illustrate a couple of our issues. I was able to search easily for an open service shop using Google Maps, but I still had to trudge there and wait awhile to get the battery installed, and you know, just the

fact that the battery he runs out. That's another issue that you point to in your book. We haven't developed the kinds of battery technologies, uh that we have and other kinds of information technology. We're still using the same technology as decades ago to power cars. We haven't really made full advance in that yet. There's no equivalent of Uber for car repairs like this, Is this a bottleneck

in the economy? Do we have to wait until we can get driverless cars that can charge batteries that last forever? There are thousands of all next and that's one of them. Or is entrepreneurs called them opportunities? Um? Uber for car repair? I think that there's probably going to be a bunch of business plans submitted to our VC friends after this podcast. I would sign up for that. And Uh, that's something that our mobile infrastructure makes easier to handle than previously.

I was just looking at some charts on battery technologies and I always astonished that it's it's really started improving quite a bit lately. Um. You know, uh, Elon Musk is bringing on the Gigafact three that's going to drive down production costs quite a bit, and and feeling they're thinking of developing even cheaper battery factory. So I think

we have a lot of barriers to overcome. Um. This is a theme that I write about in my research a lot that that when someone makes a big invention like electricity, the steam engine, or the microprocessor, then thousands, if not millions of other people have to make complementary innovations that make it really useful. And that's the process we're going through right now, whether it's with electric vehicles and self driving cars, or mobile telephony or artificial intelligence.

Al Right, professor, well, thank you very much for joining us. We'll leave it there. It's been a pleasure. So we've now heard from both Gordon and Brynjolfson. Who do you think is right? Well, we'll just have to wait and see. Maybe both of them could be right, but you know, there's there's uh they but they both raised some pretty strong points about whether the best days are behind us or whether you know, there's really no coreation between what's

happened before and what will happen in the future. It's like they say, in the markets, past performances is no indication of the future. So it just depends if we're in that age and and maybe we could have these innovations and still you know, and not have growth or growth without innovations. I was struck by Eric's upbeat tone, and that comes through in the book. Scott. I'm wondering if the period we're in now is kind of analogous to the early nineteen nineties. The popular narrative was in

America was washed up. There was a rising Asian power which was going to crush us jobless recovery, wageless recovery. And yet as the nineties unfolded, something of a great decade, and even Bob Gordon talks about progress in productivity, significant progress made in the nineteen nineties. I wonder whether we're at the cusp of something now. But the popular narrative is just so down we don't even read allies. It's

happening before our eyes. Well, that's going to keep us busy for the next ten or twenty years trying to answer these questions and talk about them with our audience. Right then, thank goodness, Benchmark will be back next week, And until then you can find us on the Bloomberg Terminal and Bloomberg dot Com, as well as on iTunes, pocket casts, and Stitcher. While you're there, take a minute to rate and review the show so more listeners can find us and let us know what you thought of

the show. You can talk to and follow us on Twitter at Daniel Moss, d C at Scotland, and our guest is it at Eric. Bring see you next week.