More explorations in stagnation

Suppose I am run a shop that builds engines and I figure out a better technique for inspecting my engines. I employ it and productivity goes up. My competitors hire away one of my engineers, find out the technique and also employ it. Pretty soon every engine manufacturer is using it and the world gets better engines. That learning by doing, knowledge spillovers and TFP all rolled into one. Its classic growth.

Now flash forward. Engines are being inspected by machine. I figure out a better program to inspect engines, I copyright it, sell it. That’s investment in equipment and software, profits for me as tech entrepreneur and capital deepening. Not so classic growth.

Well here is a chart of real GDP versus real investment in equipment and software.

FRED Graph

Growth in investment in equipment and software is well outpacing GDP. At this point its still a pretty small fraction about 7.5%, however, we all know what happens when a portion of GDP grows faster than GDP, it eventually becomes GDP.

Here is the same thing in natural logs to give a better sense of the growth rates.

FRED Graph

and once more on the same axis to show the gap closing

FRED Graph