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March 11, 2007
David Warsh, Proprietor


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Fifty Years On

The year 1957-58 was a good one for global self-understanding.  Taking a leaf from the International Polar Years of 1882-1883 and 1932-1933, scientists from 67 nations around the world undertook coordinated measurements of everything from cosmic rays to the depth of ice sheets to the composition of the crust of the earth, as part of the International Geophysical Year. The Russians sent Sputnik into orbit. The Americans sent Charles Keeling to Hawaii to begin to monitor atmospheric carbon dioxide.

And, quite separately, in Cambridge, Mass., Robert Solow published “Technical Change and the Aggregate Production Function.” Ten years later, Dale Jorgenson and Zvi Griliches supplied theoretical foundations with “The Explanation of Productivity Change.” Since then, growth accounting has turned into big business.

The result is that today we have one more thing to worry about: namely, productivity, meaning the ratio of the value of inputs to total economic output.  In some sense, the productivity perplex is even more fundamental than are the problems of global warming or the welfare state, since solutions to the latter depend on the former, that is, on the growth of knowledge (including, of course, self-knowledge).  The task at hand is to understand the determinants of this elusive factor ­ perhaps even learn to quicken its pace.

For the rate of increase of productivity is vital to our well-being. If it grows quickly, we will be rich, able to make all kinds of accommodations with demographic swings and climate change; if it grows slowly, the necessary adjustments will be much more painful. There may come a day when the human race collectively feels it has enough, and the quest for knowledge turns in other directions.  But as of now, that state of material contentment seems far off.

Since the measurement business began in earnest, there have been three distinct eras of US productivity: the long boom from 1948 to 1973, when output per hour worked (labor productivity) grew at an annual average of 3.3 percent; the mysterious twenty-year slowdown after 1973, when the rate slowed to an average of slightly less than 1.5 percent per year; and the unexpected resurgence after 1995, when the annual rate jumped up to 2.5 percent or more.

The period of the slowdown was confusing, from the standpoint of public policy debate in the United States. Economists advanced all kinds of explanations: the sharp increase in energy prices; the rise of a service economy; the growth of government; a decline in R&D spending in the 1960s; the limits to growth having been reached. Others argued that the slower rate of the ’70s was the normal rate, that the rapid productivity growth after World War II had been artificially high.

Thus the resumption of the earlier trend, after 1995, caught researchers totally by surprise. Recently, Northwestern University’s Robert Gordon recalled the mood that prevailed in January 1998, when the American Economic Association met in Chicago on the eve of another year of meteoric ascent in the stock market (the Standard and Poor 500 Index rose 34 percent in 1995, 20 percent in 1996, 31 percent in 1997, 26 percent in 1998, and 20 percent in 1999):

Everybody, including Jack Triplett [of the Brookings Institution, a celebrated growth accountant], not to mention me, was still talking about the Solow paradox [“You can see the computer age everywhere these days but in the productivity statistics.”] Nobody was talking about the productivity growth revival….

Yet Business Week had seen it coming in late 1995 [with a celebrated “New Economy” cover story], not to mention Alan Greenspan’s wise remarks in 1996 [“…rapid acceleration of computer and telecommunications technologies can reasonably be expected to appreciably raise our productivity and standards of living in the twenty-first century certainly, and quite possibly in some of the remaining years of this century”]. As late as June 1998…, I was still trying to argue that “there is something wrong with the computers.” 

These perceptions totally changed between mid-’98 and mid-’99. Since then, the debate has been an opera of contending voices seeking to explain the change. Stephen Oliner and Daniel Sichel, both of the Federal Reserve Board, touched off the debate, asking in an important paper in 2000, “Is Information Technology the Story?”

Indeed it was, replied Dale Jorgenson, of Harvard University, and Kevin Stiroh, of the Federal Reserve Bank of New York, in their 2002 paper, “Raising the Speed Limit: US Economic Growth in the Economic Age.” Some 60 percent of the gain in productivity stemmed directly from information technology, they calculated.

By 2004, however, Triplett and Barry Bosworth, also of the Brookings Institution, identified a different source. The service industries ­ airlines, broadcast, banking and the like — had contributed much of the improvement, they argued.

All the while, Northwestern’s Gordon remained the leading techno-pessimist. The speedup was partly a cyclical phenomenon, he argued, partly a one-shot boost from improved Internet-computer communications. It would prove to be no more than a surge.

Last week, when many of the principals met in Cambridge at the National Bureau of Economic Research (NBER), there were more signs of convergence among those who looked to information technology and streamlined industrial structure to explain the productivity resurgence.  Gordon, the pessimist, remained in the minority.

The stakes are high, of course. Potential Gross Domestic Product Growth depends greatly on anticipated productivity gains, and, to a lesser extent, on hours worked. If Jorgenson and Stiroh are right, the US economy can grow at around 3 percent for many years to come; if Gordon is correct, the “speed-limit” of the economy is around 2.5 percent.  Such considerations are, of course, crucial to monetary policy and fiscal policy.

Meanwhile, attempts continue to decompose national income accounts and productivity calculations along different lines, in hopes of shedding more light on the issues. In an effort to account more fully for the vast difference in productivity among nations, Charles I. Jones, of the University of California at Berkeley, and Robert Hall, of Stanford University, devised a breakdown emphasizing differences in social infrastructure, an early contribution to a nascent field now called development accounting.

The giant McKinsey consulting firm’s Washington-based Global Institute launched an ambitious study in 2000, turning up vast amounts of data and talent in the multi-year effort. And the European Union adopted the accounting framework devised by Jorgenson, Stiroh and their colleague Mun Ho, of Resources for the Future, a Washington think-tank, to compare economic performance among its member states since 1970.  The initial results are scheduled to be announced March 15.

What’s missing is the sort of method that would permit economists to test the possibility with which Iain Cockburn, of Boston University, only half in jest, closed the NBER meeting last week:  that superior American productivity of recent years owes to the vast numbers of MBAs and lawyers churned out annually by the nation’s professional schools.

The conventional wisdom, of course, is that the US trains far too few scientists and engineers. But you could take the view, said Cockburn, that having a lot of very talented people thinking about the issues in a serious and systematic way was a key to superior performance. It just wouldn’t be easy to find a persuasive way to test the proposition.

The issues of growth accounting are hugely complicated ­ enough to make understanding the determinants of climate change look relatively straightforward. There is good reason to think that economists don’t yet have the theory right.  Perhaps the next major act of global scientific cooperation will be to lay plans for the first-ever International Econometric Year.

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