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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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July 20, 2006


The Chairman Speaks: Why Don't Rising Productivity Tides Raise All Boats (Equally)?

The New Economist makes this observation:

Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using 1995 PPP exchange rates, was 77% in 1979, reached 94% in 1995, and by 2004 had slipped back to 85%. About half of this reversal was from the US surge in productivity growth, which has been much analysed. But the other half of the story, Europe's productivity slowdown, hasn't.

Whad'ya know. It turns out that Chairman Bernanke also had some things to say about this topic yesterday as well (in response to a question from Rhode Island Senator Jack Reed):

I think the primary source of the productivity gains are two.

First is the improvements in information and communication technology we've seen over the last 20 years or so.

But secondly, the United States has done a lot better at using those technologies than a lot of other industrialized countries. And I think that relates to the fact that we do have very flexible product and labor markets, we have deep capital markets that provide funding for new ventures, and we have an economy that has an entrepreneurial spirit. So we made better use of those technological changes than some other countries.

I think that is the primary source of our productivity gains...

There's some very interesting research done by the McKinsey Corporation. It's looked at firms around the world and looks at their productivity gains. And what it finds is that firms that are exposed to competition, as unpleasant as that might feel, they increase their productivity gains much more rapidly.

And so, one of the benefits, I think, of a more open trading system, a more open economy, where we compete with and trade with countries around the world, despite the fact that it does create stress and sometimes changes and dislocations, is that competition forces productivity gains and has been, I think, a source of growth for us as well as for our trading partners.

For what seems like a quite different take on the issue, check out the paper highlighted in The New Economist post linked to above, which claims it is European tax cuts that have slowed their productivity growth.  My instinct is to side with some version of the Bernanke explanation.  But there is rarely a single factor that provides a fully satisfactory explanation of any particular set of facts, and I haven't read the paper cited by TNE.  So I'll leave it as an open question. 

July 20, 2006 in Economic Growth and Development , Federal Reserve and Monetary Policy | Permalink

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Until around 1995, postwar labour productivity grew much faster in Europe than in the United States. But since 1995, Europe’s productivity catch-up ground to a halt and then reversed. The ratio of EU-15 relative to US average labour productivity, using... [Read More]

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Comments

I always ask people that think China and India are absolutely going to leave the US in the dust why. China and India are certainly going to be huge economic forces. However, China has big trouble in its banking system. While they have a nice looking GDP, with no inflation, what happens when they let their currency float and they have to deal with real capital markets? Right now, they can control everything. In the future, the market will. They remind me of the Japanese in the early 80's.

I am so glad that Big Ben recognized the American entrepreneurial culture. It is a big deal.
The government needs to recognize this and nurture it through tax policy.

Posted by: jeff | July 20, 2006 at 08:31 PM

The competition story used to make a lot of sense about 6 years ago when profits were lower and interest rates were higher. Today, though, we’re seeing huge aggregate profits despite what appears to be a very low global cost of capital, yet productivity growth has actually accelerated relative to what it was in the late 90s and 2000. As I recall, competitive equilibrium implies a “zero profit condition.”

There are two explanations I can think of that would still allow one to apply the “competition raises productivity” story to today’s economy. The most promising is heterogeneity: competition is not making Microsoft and Exxon more productive, but maybe it’s making some less successful industries more productive. The other explanation is a risk premium: the risk-adjusted cost of capital is still very high, so the apparent profits are really just the required return on capital. That one I have trouble with: considering all the cash corporations collectively are sitting on, it shouldn’t be so hard to start a price war, risk premium or not.

Posted by: knzn | July 21, 2006 at 10:24 AM

In that paper, I don't think we so much disagree with Bernanke's explanation as argue that there is more to the story (as you say). If you break the LP growth gap into TFP and capital deepening, TFP accounts for the majority -- that's what Bernanke is referring to. The problem is, TFP is pretty tough to talk about -- it;s just a residual.

When Bob and I talk about the effects of tax rates, we're referring to capital deepening. It's also important to note, as have other papers recently, that capital deepening in the US recently has been driven by low hours worked, rather than high investment -- slightly troubling.

Posted by: Ian D-B | July 21, 2006 at 05:33 PM

Ian -- Of course. Thanks very much for the clarification.

Posted by: Dave Altig | July 24, 2006 at 07:24 AM

The over-emphasis on productivity gains begins to sound like the Fed (since Greenspan) has found the Holy Grail of economic activity. Nothing could be further from the truth.

Productivity is difficult to measure because it is calculated from aggregate statistics. This aggregate performance shows performance gains but it doesn't necessarily indicate either where or why.

The American economy, like that of the UK in Europe, is in the midst of migrating from the Industrial Age to the Information Age. The Information Worker is taking the place of the Shopfloor Manual Worker as America continues to offshore manufacturing capacity, whilst specializing in R&D and engineering - both highly amenable to Information Technologies.

In this passage, it is clear that the services sectors are taking the most benefit from Information Technologies. What remains, therefore, are the lesser skilled jobs that is not transferable to offshore production. This does not mean that these jobs are necessarily cheaper. Due to scarcity, plumbers, elections and even gardeners can demand (and obtain) good revenues.

Lesser skilled jobs pervade the economy and there is little productivity enhancement from IT. Hands holding scissors and a comb cut your hair. A hand holding a hammer builds your house. Etc., etc., etc.

However, these jobs constitute the very fabric of economic activity and represent, still, the overwhelming percentage of GNP.

What does it all mean? That productivity spurred by hi-tech has been strong, but like any cyclic phenomenon, it too can become part of the landscape. It is neither "special" nor necessarily "durable" in time. Also, the sort of productivity enhancement making the headlines is likely highly concentrated.

Posted by: Tony PERLA | July 24, 2006 at 07:51 AM

Tony -- I think it is highly concentrated, hence the issues associated with inequality trends in the US, even when we move outside of the top 1%. As with other great technological leaps one would expect to see the benefits become more diffuse, even as their growth cosequences diminish over time.

Posted by: Dave Altig | July 24, 2006 at 08:11 AM

Tony,

While you're right that for many sorts of production, such as construction, IT doesn't play a huge role, you'd also be surprised at the places it pops up. Retail is a huge sector of the economy, and a large part of its productivity growth has been driven by IT capital. All the inventory control that Wal-mart has, and all the automatic checkout lines you see in the grocery store are IT capital deepening.

Think about UPS -- they're doing a pretty mudane thing delivering packages, but they now have online tracking and those wireless things you sign whenever you get a package.

Posted by: Ian | July 24, 2006 at 09:33 AM

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