How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantage: Austan Goolsbee Channels John van Reenen

Austan writes:

How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantages: The United States miracle of the 1990s was that our productivity began growing faster than that of other countries, even though we were the richest to start with. The popular explanation... pointed to information technology.... Rather than a traditional drop of 20 percent a year, computer prices began falling more like 30 percent a year. This may sound subtle, but it couldn’t be more dramatic. After 10 years of such declines, the 20 percent rate would have left computer prices almost four times higher than the 30 percent rate did. Low computer prices drove mass adoption of technology and, hence, the productivity miracle was born. Or so the story goes.

The only problem is, the explanation doesn’t work, according to John Van Reenen... the prices of information technology fell in Europe, too. And Europeans bought information technology. But they had no productivity miracle. To explain the experience in the United States, one would have to believe that Americans have some better way of translating the new technology into productivity than other countries. And that is precisely what Professor Van Reenen’s research suggests.... If American companies turn computers into productivity better than anyone else, can businesses in Britain do the same when they are taken over by Americans? And in the huge service sectors — financial services, retail trade, wholesale trade — they found compelling evidence of exactly that. American takeovers caused a tremendous productivity advantage over a non-American alternative. When Americans take over a business in Britain, the business becomes significantly better at translating technology spending into productivity than a comparable business taken over by someone else. It is as if the invisible hand of the American marketplace were somehow passing along a secret handshake to these firms....

Throughout the service-based economy, American companies have proven remarkably adept at adjusting to new conditions and incorporating technology. Since these industries represent a large majority of our economy, the news is rather good. The real question is whether this advantage will last. In an interview, Professor Van Reenen observed that there are two possible outcomes. One is that the last 10 years were an aberration, a one-time happenstance whereby the United States took advantage of the drop in computer prices to pull away from the competition. Under this theory, the United States will soon return to its normal long-term productivity growth rate as the rest of the pack catches up and copies what the American companies did — the same old convergence story....

We hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

Comments

[Bruce Wilder]

The title says "How", yet the article only asserts the fact, without any explanation.

[foo]

This has little to do with IT. In 1991 the attitude was 'if it is not done today, it will be done tomorrow'. In 2006 it was 'if it is not done today, you will be looking for job tomorrow'. You have to run ever faster just to stay in place.

[Alex Tolley]

I thought that Gordon had shown that US productivity growth in IT was centered on PC production by companies like Dell.

Recently Business Week suggested that the economic figures are skewed because of how trade prices (?) are calculated, suggesting that the US has over-reported GDP growth and with it productivity.

The US takeover of companies is a nice counter-example to the above, but does it mean anything more than US methods of restraining wage growth, firing workers, outsourcing more efficiently etc, rather than using IT better. I would have to read the article to determine if the authors had been able to identify the factors the factors correctly. I'm skeptical that using computers and software is somehow done more efficiently in the US than elsewhere. Of all factors that are easy to copy and spread globally, this is one of the easiest.

[Alex Tolley]

I thought that Gordon had shown that US productivity growth in IT was centered on PC production by companies like Dell.

Recently Business Week suggested that the economic figures are skewed because of how trade prices (?) are calculated, suggesting that the US has over-reported GDP growth and with it productivity.

The US takeover of companies is a nice counter-example to the above, but does it mean anything more than US methods of restraining wage growth, firing workers, outsourcing more efficiently etc, rather than using IT better. I would have to read the article to determine if the authors had been able to identify the factors the factors correctly. I'm skeptical that using computers and software is somehow done more efficiently in the US than elsewhere. Of all factors that are easy to copy and spread globally, this is one of the easiest.

[Alex Tolley]

I thought that Gordon had shown that US productivity growth in IT was centered on PC production by companies like Dell.

Recently Business Week suggested that the economic figures are skewed because of how trade prices (?) are calculated, suggesting that the US has over-reported GDP growth and with it productivity.

The US takeover of companies is a nice counter-example to the above, but does it mean anything more than US methods of restraining wage growth, firing workers, outsourcing more efficiently etc, rather than using IT better. I would have to read the article to determine if the authors had been able to identify the factors the factors correctly. I'm skeptical that using computers and software is somehow done more efficiently in the US than elsewhere. Of all factors that are easy to copy and spread globally, this is one of the easiest.

[Ponzi Q. Globalization]

"You have to run ever faster just to stay in place."

Is this the promise to American workers of neoliberalism? Of globalization? What a hot steaming pot of horse manure!

You're given one life in this world and economists in their religious fervor want us to live like dogs for the wonderful equalibriumized future.

However, we can take some comfort in the fact that wealth inequality is growing like kudzu all over the globe. I sleep better at night knowing that CEOs and investment bankers will be able to buy even bigger summer homes, get even hotter and younger trophy wives and husbands, and throw even more lavish parties for their families on the increased insecurities of the American workforce. It's a small price to pay for the further enrichment of these giants of industry and finance who have stepped out of an Ayn Rand wet dream into our world.

[Christine]

I'll give you a two word answer for where this 'productivity miracle' is coming from. Deficit spending. Some time in the next decade those Chinese bond holders are going to want the fruits of their productivity miracle back.

[Ponzi Q. Globalization]

Before the spelling police get me, in my rant above, "equalibriumized" should be changed to "equilibriumized".

[Christine]

I assume Ponzi would be happier under Mao or Lenin?

[Christine]

I assume Ponzi would be happier under Mao or Lenin?

[Ponzi Q. Globalization]

"I assume Ponzi would be happier under Mao or Lenin?"

Yeah, Christine, you're right on the money! It's neoliberal globalization or commie tyrants slaughtering millions. And, as you assume, I'm going with the commie tyrants.

After all, these are the only two choices we have in this world we live in, so chock full of false dichotomies and underhanded ad hominems.

[Meh]

I read the article when Mark Thoma posted it and it's largely evidence free when it comes to the "US takeovers" part. That is to say, they don't name the companies involved and show no methodology for controlling for other factors that may improve productivity after a takeover.

Just to name an obvious one, a takeover is a natural point for "dead wood" to be pruned out of a company, which tends to make the productivity figures look a lot better.

As for the "Europeans bought IT too" they did, but they started buying it later and so we should expect the productivity benefits to kick in later and we should also take into account local conditions (particularly the number of long term unemployed being drawn into the workforce) that may affect productivity data.

[vtcodger]

Does anyone else have this sort of unpleasant feeling that US productivity improvements are somehow due to shipping jobs overseas and keeping some of the profits from the outsourced labor at home? That's better than shipping the profits overseas also, but it's probably neither desirable nor sustainable.

I would note that IT is a huge industry. It's certainly true that in some times and places it makes the production and distribution of goods substantially cheaper. It is also true that much of the IT effort is not directed at making goods better, faster, cheaper, but rather to the production of unnecessary or counterproductive reports, analyses, and other silliness on a massive scale. I'm very skeptical that IT's affect on productivity can be measured in meaningul terms. I'm also skeptical that its net effect is as positive as most folks assume.

Communications technology on the other hand clearly has helped to move many business activities from high labor cost first world domains to lower cost offshore domains. Good for consumers. Bad for high cost labor. The question is whether this shift is or should be counted as an increase in productivity

[John Emerson]

Goolsbie: "We hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting."

"Force people to look for new jobs": new jobs, sometimes. Maybe worse jobs. Maybe no job.

Productivity is output per labor input, so obviously doing the same work with less labor will increase productivity, and doing more work with the same labor increases productivity, and doing more work with less labor per unit increases productivity.

Why is there thought to be a paradox about the fact that American productivity has increased without benefitting American labor? Reducing the labor share is one of the methods of increasing productivity. Conservative and libertarian economists think that reducing the labor share is a very good thing, because their goals are not for the American people as a whole but for the American economy as a whole and the better-off ("more productive") people within it.

American labor is being squeezed at least five ways: by imports, by immigration, by technological change, by the weakening of unions and labor law, and by decreases in discretionary government spending (e.g., the increased cost of higher education). Many conservatives think that all five of these trends are good ones, and that the weakened position of American labor is a good thing.

If American labor (and the bottom half of the income hierarchy) have any political representatives, they are in the Democratic Party. But a large faction in the Democratic Party has bought the freemarket argument on many or most of those five points.

"We are so good at adjusting" = "American labor has no political power."

Michael Lind's "Made in Texas" claims that Bush is an heir of the East Texas post-Confederate planter class (allied with the Central American planter class), which believed firmly that the ideal is an elite government ruling over a demoralized, dispossessed, disenfranchised, uneducated labor force. That's a real possibility for America's future (with some adjustments with regard to education -- probably the beefing up of all-vocational tech schools on the JC model.)

[John Emerson]

"I'll give you a two word answer for where this 'productivity miracle' is coming from. Deficit spending."

Oddly enough, federal deficit spending, through pork barrel and graft, was also responsible for the strong Republican Party discipline during Bush's first six years. Bush pushed his program through at the cost of aggressively ignoring the Republican Party's supposedly central "fiscal conservativism" principle, and only a few Republicans complained. (Though of course, whenever the time came to cut a social program or to cut education, fiscal conservate slogans were piously intoned.)

[Bruce Webb]

I have to puncture this discussion with data, but assuming that 'productivity' here is the same as 'productivity' as defined by the BLS, the whole premise is questionable. Official US productivity fell off a cliff in 2003 for reasons no one seems to be able to explain, but the numbers are what they are:

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=PRS85006092

BLS: Labor Productivity
Year Qtr1 Qtr2 Qtr3 Qtr4 Annual
1997 -1.3 4.9 3.4 1.7 1.6
1998 3.2 1.2 4.5 2.1 2.8
1999 3.7 0.7 2.8 7.2 2.9
2000 -1.7 7.4 -0.9 4.0 2.8
2001 -0.5 5.6 1.8 6.3 2.5
2002 6.9 0.7 4.2 -0.1 4.1
2003 3.4 5.7 10.4 -0.5 3.7
2004 1.9 4.9 0.2 0.4 2.9
2005 4.0 1.5 3.7 -0.6 2.1
2006 3.5 1.2 -0.5 2.1 1.6
2007 1.0

Maybe I am missing something but it really seems like the title of this post should end "Austan Goolsbee Channels John van Reenen (in June 2003)". Because that is a pretty ugly number series since 2002 and certainly not much evidence for the 'miracle of tax cuts'.

I follow the Productivity series pretty closely but can't say I really understand it or the factors that drive it, and as such would be happy to be given a little tutorial. But on the surface it sure looks like Bush took trend 2.8% and is driving it straight down the hill.

(Sorry about the formatting, I don't know how to just grab the table directly. For clarity the numbers series since 2002 4.1%, 3.7%, 2.9%, 2.1%, 1.6% 2006)

[beckya57]

If this is true (and I lack the expertise to judge that), it's just another argument for greatly strengthening our safety net. If keeping an economy flexible is so important, than we need to keep workers from becoming intensely dissatisfied with the impact on them, otherwise they might start supporting anti-flexibility policies, e.g. protectionism. However, we've moved in the opposite direction. If this continues, at some point we may get a revolt at the polls, which could end up damaging the economy, and possibly our society. And it isn't just that workers are "forced to look for new jobs;" many workers end up with vastly inferior jobs and a greatly compromised standard of living. It isn't realistic to think that this state of affairs can continue indefinitely.

[derrida derider]

What Meh said - there is an obvious selection problem here. A company which takes another over is almost by definition successful, while the company taken over is almost by definition unsuccessful. So when an American company takes over a British one it is likely to be an more-successful-than-the-American-average company taking over a less-successful-than-the-British-average one. It would be most surprising if the taken over company did not then show a productivity increase.

[Dave]

In my case, all my productivity gains came from working longer hours. Pretty much the same thing happened to everyone I know, except for the ones who got fired.

That got my productivity up even more.

Fortunately, CNN had an economist on the air to explain to me that the "recovery" was creating millions of "jobs".