#1 US workers' productivity surges: Gerard Baker and Peronet Despeignes #2 Not much of a new economy: Robert Gordon finds little evidence of a third industrial revolution taking place across most of US industry ------------------------------------------ #1 US workers' productivity surges By Gerard Baker and Peronet Despeignes in Washington Published: August 8 2000 20:17GMT | Last Updated: August 9 2000 04:44GMT US workers' productivity grew at its fastest pace in 17 years in the year to June, depressing labour costs and raising renewed confidence in financial markets that the record-breaking expansion is set to continue. Productivity - workers' output per hour - in the non-agricultural sectors of the economy grew at a seasonally adjusted annual rate of 5.3 per cent in the second quarter, the Labor department reported on Tuesday. In the year to the end of the second quarter, output per hour rose by 5.1 per cent, the fastest year-on-year rate of increase since 1983. The figures seemed to provide further evidence that investment in the so-called new economy of information-technology enhanced production processes has transformed US economic performance, raising the rate at which the economy can safely grow without causing inflation. Though workers also enjoyed a sharp rise in hourly pay - up by 4.7 per cent in the year to June - the productivity surge meant unit labour costs actually declined by 0.4 per cent. The inflation-friendly news, combined with recent signs that the US economy is cooling, could keep the Federal Reserve from raising short-term interest rates when its policy-making open market committee meets on August 22. Financial markets reacted positively as expectations that the Fed would not move rates hardened. "The recent surge in productivity growth evidenced in today's numbers has kept both labour market tightness and inflation pressures in check for now," said Peter Hooper, chief US economist at Deutsche Bank in New York, who on Tuesday left the dwindling ranks of Wall Street economists expecting an increase in rates on August 22. Enhanced productivity performance has been the key to US economic success in the last few years. After 20 years during which productivity grew at an average annual rate of around 1.5 per cent per year, the pace suddenly began to accelerate in the mid-1990s. The latest figures may somewhat overstate the trend rate of improvement. Alan Greenspan, the Fed chairman, has indicated in the past that he favours what appears to be a more reliable measure of productivity growth than the headline non- agricultural business figure - the non-financial corporate sector productivity. Second quarter figures for this measure will not be available until September but recent data suggest growth is in the range of 4 per cent a year. The most striking aspect of the figures, however, is that productivity growth still appears to be accelerating. Some of the improvement in output per hour is almost certainly the result of cyclical factors. The strong demand growth of recent years has been met in part by companies sweating more productivity out of their labour force. But there seems little serious dispute with the view of Mr Greenspan that much of the increase is structural. The Fed chairman has also noted that, while the US has undergone a transformation in the last few years, other countries have not recorded any noticeable improvement in productivity. He suggested last month that may be because labour market rigidities make it harder for European and Japanese companies to substitute labour-saving technology for workers. ----------------------------------------------------------- #2 Not much of a new economy Robert Gordon finds little evidence of a third industrial revolution taking place across most of US industry Published: July 25 2000 18:54GMT | Last Updated: July 25 2000 19:01GMT The "new economy" has been compared in importance to the invention of electricity and the internal combustion engine, and journalists frequently describe it as an industrial revolution. Is this comparison to these great inventions of a century ago justified? It would be much too broad to describe the new economy as "everything the electronic computer has ever achieved". Decades ago, mainframe computers transformed the production of bank statements, telephone bills, and facilitated multimillion trading days on securities markets. But the mainframe did not budge the growth rate of US productivity from the doldrums during the dismal years of 1972 to 1995. Yet the new economy is suddenly upon us, represented by the miracle of American economic growth since 1995 outstripping what was previously thought possible. A focused definition of the new economy is the acceleration of technical change in computer production since 1995. As shown in the chart, the price of computer power measured in megabytes of memory or gigabytes of hard drive capacity fell after 1995 at 30 to 40 per cent a year - double the rate of price decline before 1995. This technological acceleration has been accompanied by the invention of web browsers and widespread internet access. My sceptical view of the new economy starts with an empirical observation that US productivity acceleration has been lopsided. While productivity growth has taken off in durable manufacturing, including not only computer hardware but also telecommunications, automotive manufacture and steel-making, there has been no visible productivity pay-off for massive computer investment in the remaining 88 per cent of the economy. The second part of the sceptic's case relates to the description of the new economy as an industrial revolution. First, let us "peel the onion" of the US productivity acceleration since the end of 1995, when productivity has grown 2.75 per cent at an annual rate, in contrast to the dismal years of 1972 to 1995 when the growth rate was only 1.42 per cent a year. The chart peels apart this acceleration of 1.33 percentage points a year into its underlying components. First comes the cyclical component. When output growth is unsustainably fast - as in 1999 - productivity also grows faster than its sustainable long-run trend. This removes 0.5 percentage points, leaving the acceleration in the sustainable trend at 0.83 percentage points. Two minor components - changes in measurement and a slight improvement in labour composition - account for another 0.19 points, reducing unexplained acceleration to 0.64 points. This 0.64 points was achieved almost entirely within the durable manufacturing sector, consisting of a 0.29 contribution from faster technical change in computer hardware, and another 0.28 from technological acceleration in the rest of durable manufacturing. What is left over for the remaining 88 per cent of the economy outside durables? Only 0.07 per cent - a mere pittance. The vast majority of computers are installed outside durable manufacturing. The standard arithmetic used by economists suggests that this massive investment in computers, the so-called "capital-deepening" effect, should have increased productivity growth by about 0.33 points - not the mere 0.07 that emerges from my analysis. Either the computers have been remarkably unproductive, or there has been a technological retardation outside the durable goods sector. Something is wrong; what could it be? There are a number of differences between the computer and the great inventions of the late 19th century, but perhaps the largest is the unprecedented rate of decline in the price of computer power. Elementary economics shows that this rapid decline in the marginal cost of computer power must be matched by an equally rapid decline in its marginal utility, or benefit. Exponential increases in computer capability collide with a fixed supply of human time to invoke diminishing returns to computer capability at an unprecedented rate. In my case, the PC on my desk represents 30 times as much GDP as the one that sat there in 1983, but neither my mind nor fingers move any faster now. The important puzzle of the new economy is why the internet has attracted such huge amounts of investment in computer hardware and software without any visible productivity pay-off outside durable manufacturing. At least four factors may play a role in this: market share protection; re-creation of old activities; duplicative activity; and personal internet use while at work. First, the need to protect market share against competitors explains much internet activity. Barnes and Noble and Borders would have been content to play a dominant role in book retailing, but were forced by competition from Amazon to become "clicks and mortar" organisations. Second, much internet content is not truly new, but rather consists of pre-existing forms of information - airline schedules and stock quotes - made available more cheaply and conveniently. In contrast, the great inventions of the late 19th century created truly new products and activities. Third is duplication. Much e-commerce is an alternative to mail-order catalogue shopping. Yet the catalogues have not disappeared. Indeed, with the exception of the initial step of replacing a human telephone response with a computer interface, e-commerce duplicates all the other costs of catalogue retailing: building and stocking warehouses, selecting items from warehouse shelves, and so on. Fourth is the problem of the growing distraction of personal web surfing. One research service found that people spend more than twice as much time online at the office as they do at home. Employers are so disturbed by the continuing use of office computers for personal use that the number of companies using "surveillance software" to monitor their employees' e-mail usage is soaring. The rapid onset of diminishing returns suggests that the greatest productivity contribution of computers lies in the past, not in the future. Enthusiasts should reconsider whether the new economy and internet will transform everyday life as profoundly as did electric light, the electric motor, home appliances, the commercial aircraft, and other components of the second industrial revolution of a century ago. The writer is Stanley Harris professor of economics at Northwestern University _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
