Time on George W. Bush, November 6, 2000
Today's Health Care Ration-by-Hassle Moment: Lamorinda Pediatrics

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.