Craig Alexander is chief economist at Deloitte Canada.
Bank of Canada Governor Stephen Poloz recently gave an insightful speech on how the digital revolution has implications for how central bankers think about the appropriate level of interest rates. His remarks add to a considerable debate about whether we are accurately measuring economic activity in the digital age. The traditional economic accounting framework used by national statistical agencies was developed to measure the manufacturing-based economy of old. It was designed to count the number of widgets produced in the factory by the workers employed. But the economy has evolved into a very different animal.
The Canadian economy is increasingly dominated by services; and digital is playing an ever-more fundamental role. It is hard to measure and properly value services, digital ones in particular. Web browsers, provided free to users, put the cumulative information of the internet at people’s fingertips. Apps are transforming how people get information and how they interact with the world around them, such as digital payments and access to GPS navigation. Cloud computing and digital analytical tools are helping businesses to find ways to be more efficient and competitive. Digital channels are allowing content producers to communicate to a wide audience. The potential application of artificial intelligence is in its infancy, and yet business applications already abound.
A key issue is whether the gains from technology are being fully captured in the major economic statistics. Across the advanced countries, productivity growth has been on a declining trend and this has contributed to the concerns about an environment of slow economic growth over the past decade. The timing of the loss of momentum in productivity seems odd given the digital revolution unfolding around us.
Economists have come up with four somewhat competing views, which should come as no surprise if you know any economists. First, there is the view today’s innovations are less impactful than the technological advances of the past. Second, there is the argument the gains from digital are not being adequately measured. Third, there is a camp that argues the digital transformation is still in its early stages. Finally, there is an interesting perspective that the productivity gains from the new technology are being reaped by a small subset of businesses that tend to be younger and more innovative. These highly profitable and rapidly growing firms are the shining beacons of economic performance in a crowd of less innovative firms that are pulling down national productivity metrics.
All four positions have some merit. It is likely the case that the shift from agriculture to industrial production or the invention and application of electricity were potentially greater than the advances in digital, but that doesn’t preclude the important productivity gains of the latest development. Measurement is obviously problematic. If we are not capturing the impact of technology on prices, we will underestimate real GDP growth. It is surely true that many of the technological gains are still ahead of us. And it is evident some firms are clearly better than others at innovating with digital.
The policy and business implications are profound. Mr. Poloz noted that digital technology may raise aggregate supply. If so, the risks of inflation are lower and that means interest rates may not need to rise as much when central banks are rebalancing monetary policy. For governments and businesses, the implications of correctly measuring and valuing technological change is critical. Economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi said that, “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.”
Ultimately, we need better and broader metrics that provide a holistic perspective of economic performance in the digital age. Meanwhile, policy-makers formulating new initiatives to promote competitiveness and growth might want to focus more on understanding what is driving the rapid growth in innovative companies found in all sectors of the Canadian economy and consider regulatory reforms that will facilitate technical change and realize its potential. It might also be the case that businesses are underinvesting in capital today because they are underestimating the value and impact of new technologies.
Mr. Poloz ended his speech with the comment, “Digital disruption is likely to be a major preoccupation of central bankers for the foreseeable future.” They shouldn’t be alone.