Quantifying technology’s role in transforming the economy

June 25, 2024

For more than a decade, U.S. economic growth has suffered from a lack of both automation and new general-purpose technologies (GPTs), which unleash “creative destruction” on a massive scale throughout the economy. 

But new Vanguard research suggests that artificial intelligence (AI) will prove to be the next GPT, powering above-trend growth. Our Megatrends research paper AI, Demographics, and the U.S. Economy discusses the importance of GPTs in driving periods of above-trend growth over the last 130-plus years.

“If the AI impact approaches that of electricity, our base case is that [productivity] growth will offset demographic pressures, producing an economic and financial future that exceeds consensus expectations,” Joe Davis, Vanguard global chief economist and the paper’s lead researcher, writes in this recent commentary.

A chart shows the contribution of technology to the trend rate of U.S. productivity growth over the last 130 years. The chart also breaks technology's contribution to productivity changes into three drivers—augmentation, efficiency, and transformation—that have tended to move in waves. Efficiency and transformation have played much bigger roles than augmentation. One of the largest spikes in productivity over the full period accompanied the widespread diffusion of electricity as a general-purpose technology (GPT) in the 1920s. At its peak, electricity lifted the trend rate of U.S productivity growth rose by about 0.8 percentage point. The biggest productivity boom owed to World War II—when the peak increase in the trend rate of U.S productivity growth was more than 1 percentage point—while another, electricity-sized surge in productivity owed to automation in the wake of the war. A much smaller rise in productivity in the 1980s and '90s reflected the diffusion of information and communication technologies. Since roughly 2010, however, a lack of GPT and automation has been dragging down the trend rate of U.S productivity growth by amounts approaching –0.8 percentage point.

Notes: The chart shows the historical contributions of transformation, efficiency, and augmentation to the deviation of productivity growth from its long-run average, from June 30, 1891, through September 30, 2023. Transformation refers to general-purpose technologies (GPTs) that (eventually) unleash creative destruction through the economy. Efficiency refers to advances that raise GDP per worker, usually by automating away tasks previously performed by human labor. Augmentation refers to technological advances where humans benefit from machines, such as personal computers and power tools, raising productivity and trend employment. Our research quantifies the prospects of AI transforming the economy in the years ahead.

Source: Vanguard calculations, as of May 2024.

This new research harnesses a uniquely long and rich dataset that captures historical shifts in megatrends, which have driven about 60% of the change in per capita GDP growth. It finds that, among megatrends that also include demographics, fiscal deficits, and globalization, only technology has been a consistent, powerful driver of growth as well as inflation, stock market valuations, and the Federal Reserve’s nominal target for short-term interest rates.

Notes: All investing is subject to risk, including the possible loss of the money you invest. 


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