ANALYSIS-Death knell heard for U.S productivity bears
By Tim Ahmann
Friday May 31, 12:50 pm Eastern Time
WASHINGTON (Reuters) - In the end it took a recession, but many economists say the "New Economy" debate over whether high technology investments spurred a long-lasting improvement in U.S. economic performance is finally over.
"Something fundamental of an underlying nature has been occurring," Federal Reserve Chairman Alan Greenspan concluded in assessing recent figures on productivity growth -- the economic building block that has been the key to raising American standards of living.
The remarkable increase in the amount of goods and services workers were able to churn out in every hour on the job during the U.S. economic boom in the late 1990s divided economists into two camps.
One camp argued the fast pace of growth in labor productivity was more or less a permanent shift in the economic landscape. The other said that, to a large degree, it simply reflected a rapidly expanding economy and was therefore temporary.
After gaining around 1.5 percent a year for two decades, productivity soared in the second half of the 1990s, notching an average annual growth rate of 2.4 percent.
While that growth faltered as the economy fell into recession last year, it did not crumble, as is often the case in a downturn. And it quickly got up to racing speed once the slump drew to a close. Productivity expanded at a sky-high 8.4 percent annual rate in the first quarter, building on a 5.5 percent gain in the final three months of last year.
"These data are important," Morgan Stanley economist Richard Berner told clients earlier this month. "They blow away the pessimists' argument that the productivity improvement ... was merely the product of that era's economic boom."
Robert Gordon of Northwestern University is the economist most often associated with the view that the late 1990s productivity boom was exaggerated by the economic cycle.
In a paper published in 2000, Gordon found that more than a third of the acceleration in labor productivity in the late 1990s was due to cyclical factors.
"Yes, part was cyclical and much was not cyclical," he said in an e-mail to Reuters that showed no shift in his views.
He dismissed the upsurge around the start of the year as "a typical pattern observed in the first few quarters of every cyclical expansion."
But many other economists have said the "New Economy" argument about a fundamental shift is increasingly persuasive, and some who faced brickbats in the past for their productivity optimism find themselves breathing a little easier.
"I'm sort of feeling more comfortable about that now," said Martin Baily, who served as a top economic adviser to former President Bill Clinton. "I think what we're seeing right now is clearly consistent with the continuation of the strong productivity growth of the late 199Os."
Indeed, some economists even question whether the fast productivity growth the United States enjoyed as the 20th century drew to a close was underestimated, even as they say the latest out-sized gains certainly overstate the trend.
BEHIND THE NUMBERS
"It's conceivable, though we do not yet know, that the growth in underlying productivity in the latter years of the 1990s may have been somewhat underestimated," Greenspan mused earlier this month in Chicago.
The question is important because productivity growth, coupled with growth in the labor force, determines how quickly the economy can expand without generating inflation.
Microsoft cited Greenspan's recent comments in a newspaper advertisement last week touting the benefits of information technology investments. "Greenspan suggested that U.S. productivity may grow even faster this decade than in the late 1990s," the software firm said.
A research paper last year found measured productivity growth in the late 1990s was understated by 0.6 percentage points because so much effort was spent putting new technologies into place, rather than being employed in directly raising output.
The paper's authors, John Fernald of the Chicago Fed and Susanto Basu and Matthew Shapiro of the University of Michigan, estimated that when technology investment slowed -- as it did before the U.S. economy fell into recession last spring -- productivity growth would get a boost as firms turned attention to putting the innovations into use, a thesis consistent with the behavior of productivity over the last year.
However, the researchers were careful not to draw a conclusion about trends going forward and productivity expert Dale Jorgenson of Harvard University shares that caution.
"The pessimists are wrong, but that shouldn't lead you to the opposite extreme that somehow or other there are prospects for going beyond what we did," Jorgenson said.
He expects productivity growth to continue at the late 1990s rate for the next decade, with technology advances being offset by a slower rate of investment spending as the economy expands more slowly due to a slower rate of labor force growth.
WHITE HOUSE OPTIMISTIC
Glenn Hubbard, a top economic adviser to President George W. Bush, is among those who can be counted among the growing ranks of productivity optimists.
Commenting on the fast pace of productivity growth in the first quarter, Hubbard said, "I see in that ... a real indication that the 'New Economy" or improvements in productivity are more or less permanent."
In fact, the Council of Economic Advisers, which Hubbard chairs, argued in The Economic Report of the President in February that the true underlying rate of productivity growth from 1995 to 2001 may have topped 3 percent annually, nearly a half-point higher than the measured rate.
The CEA said rapid hiring to accommodate a step up in demand could have dampened productivity gains. "Adjusted for this cyclical effect, structural productivity has accelerated by 1.70 percentage points (from the 1.37 percent annual rate posted from 1973 to 1995)," the council said.
Such views make Harvard's Jorgenson look downright pessimistic. "It's entirely a good news story and the fact that the optimists are wrong doesn't mean that the economy hasn't improved. It's improved a lot," he said. |
