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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (48863)	5/1/2000 11:19:00 PM
From: UnBelievable	Read Replies (2) \| Respond to of 99985

I Don't Know if it is True, But It is Interesting From the New York Times Op Ed page May 1, 2000 nytimes.com Wired Offices, Same Workers James Grant In the new church of American finance, the first article of faith is progress. More and more goods and services will be produced with fewer and fewer hours of labor, world without end. Evidence in support of this belief would appear to be conclusive. First, there is the revolution in computer technology. Second, there seems to be official affirmation in the national productivity statistics. To compute these statistics, the Labor Department divides the volume of our national economic output by the hours worked to create it. In the third and fourth quarters of 1999, the productivity of American nonfarm labor rose at annual rates of 5 percent and 6.4 percent, the fastest in years. Expectations are running strong that the next productivity report, to be released on Thursday, will be just as brilliant. It will be a miracle if it is. If the strength of the recent productivity reports seems unbelievable, it is perhaps because they are. James Medoff, a Harvard economics professor, and Andrew Harless, an economic consultant in Needham, Mass., have uncovered deep-rooted flaws in the data. Their conclusion is that the numbers were distorted in the melee associated with the run-up to the year 2000. If they are right, as it seems apparent they are, the "New Economy" is about to lose some of its luster. Nobody who has ever changed a typewriter ribbon would deny that computer technology has lightened labor's burden. Then again, so has air conditioning. Indeed, without climate control, there could be no electronics. To date, Willis Haviland Carrier, the Bill Gates of the air conditioner, has been a greater benefactor to humanity than Bill Gates. In a paper presented to the Congressional Budget Office last June, Robert J. Gordon, a Northwestern University economist, broached a surprising discovery. Since 1995, Mr. Gordon wrote, "there has been no productivity growth acceleration in the 99 percent of the economy located outside the sector which manufactures computer hardware." In other words, the most notable contribution of computers to the recent growth in productivity has been in manufacture of more computers. On the eve of the new millennium harried workers were replacing computers and computer software that might go haywire once the ball was dropped in Times Square. The looming crisis of the computer clocks caused two important distortions in the government's statistics, Professors Medoff and Harless have found. The number of hours that Americans worked were minimized, and the volume of output produced by their labor was exaggerated. Innocently, the government assumed that nonproduction workers clocked an average of 37.6 hours per week in the months during which everybody who had anything to do with the maintenance and smooth running of a computer system was sleeping on the floor of his or her office in full crisis mode. By underestimating the number of hours worked, the government flattered the efficiency with which the work was performed. What was this work? The wholesale substitution of muscular new computers and software for the non-Y2K-compliant kind. In the government statistics, a step up in computing power registers not only as a rise in quality but also as an increase in output. So the high-tech preparation for the new year created a kind of statistical boom. It was a mirage. "To an observer unaware of the Y2K issue," Mr. Medoff and Mr. Harless wrote in their study, which I commissioned for Grant's Interest Rate Observer, "it might appear that the new computers must have possessed an extremely large amount of computing power -- otherwise, why would people be so eager to buy them? And since the Labor Department's price index didn't take account of the Y2K issue, it would make a similar misattribution, and conclude that an extreme amount of computing power was now available at a reasonable price. As a result, the statistics would show productivity increasing particularly quickly. And so they did." The faulty perception of a new age of productivity growth has served as a kind of skyhook on which Wall Street has hung some of the most optimistic stock-market valuations in history. At the least, Thursday's number should give the brokers something to talk about. James Grant is the editor of Grant's Interest Rate Observer.