Williams links 1970s productivity slowdown to stagflation and 1990s-2000s boom to low-inflation prosperity.
“The productivity slowdown of the 1970s contributed to stagflation. And the productivity boom of the late 1990s and early 2000s was a contributing factor to that decade’s economic prosperity with low inflation.”
Williams notes productivity growth swings from minus 2 to 7 percent yearly versus 2 percent long-run average.
“Year-over-year productivity growth swings from minus 2 percent to 7 percent, compared to the long-run average of just over 2 percent ( Figure 1 ).”
Williams identifies two distinct productivity regimes: 3 percent during boom periods versus 1.5 percent otherwise.
“In each of these episodes, productivity growth averaged around 3 percent. At other times, relatively slow productivity growth of around 1-1/2 percent prevailed.”
Williams says AI investment will support productivity growth but currently supply and demand are racing.
“I am confident that these investments will support strong productivity growth in coming years. But, right now, we’re in a race between available supply and surging demand.”
Williams says standard theory paradoxically predicts productivity increases cause downturns with declining investment and hours worked.
“Assuming immediate recognition, standard macroeconomic theories predict a paradoxical result: an increase in trend productivity growth drives up real interest rates and causes an economic downturn, with hours worked, investment, and output declining.”