The Federal Reserve Bank of San Francisco just issued a report showing how Okun’s Law—the historical relationship between changes in GDP and unemployment—is starting to break down. In other words, rising productivity is resulting in less job creation than has historically been the case.
In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun’s law. If Okun’s law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.
In my book, The Lights in the Tunnel, I argue that the heavy emphasis on econometrics (statistical economic data analysis) in modern economics is problematic because it is entirely focused backward on historical data. Economists generally refuse to accept any ideas that are not backed by hard data and quantitative analysis. However, all the “hard data” is OLD—often years or even decades old. If, in fact, the exponential acceleration of information technology is going to have a dramatic impact (as I believe) in the future, that is going to be very hard to pick up looking exclusively at past data! I think the only way to see what’s coming is to think through the implications of the actual technologies likely to be developed in the coming years and decades.
Nonetheless, it looks like the economists at the SF Fed have started to pick up something in the data. I think as time progresses there will be more and more quantitative evidence to support the theories that I am advocating here. The problem, of course, is that by the time the PAST data is unambiguous and everyone has no choice but to acknowledge the problem, the future is going to look very bleak indeed. Perhaps the economists should spend a little less time looking at their historical data and a little more time looking at the computer they are using to analyze it—and how the capability of that machine and the software that runs on it is changing over time.