To: TimF who wrote (357447 ) 11/8/2007 1:38:55 AM From: tejek Respond to Europe -potential output growth. The most frequent claim in this regard has been that US labour productivity growth, after having lagged behind Europe during the 1980s, has rocketed ahead of Europe in the last ten years, as the US economy has experienced a more profound IT revolution, presumably due to the US economy’s superior flexibility. This story, which finds fertile ground in US and liberal circles, at least appears to be supported by the numbers. The OECD forecasts US potential output per employee to grow 2.1% a year from 1997 to 2005, compared with only 1.3% in the euro zone, and 2.5% annually in 2006-09 (versus 1.5% in the euro zone). Much criticism of European productivity performance focuses on this measure of output per worker. A more accurate reflection of labour productivity, however, is to be found in the measure of output per hour worked. In the US, this measure is only published for the non-farm business sector; during the last ten years, this has grown by an average annual 2.6% in the US. Applying the European measure of GDP per hour worked across the entire economy (including the public sector), one finds that US productivity has risen at an average annual rate of only 2.0%, only modestly faster than the euro zone’s 1.7% annual average over the last ten years. According to a study by Kevin Daly of Goldman Sachs (also cited in the above mentioned Economist analysis), adjusting still further for differences in the two zone’s economic cycles, trend productivity growth in the euro zone has even been slightly higher (1.8%) than in US over the last ten years (1.7%). Indeed, over the last 20-plus years, the euro zone’s productivity level, measured in terms of output per hour worked, has increased from less than 80% of the US level to just over 95%. The claims of such critics of Europe only become credible at all if we concentrate on the most recent period since the early days of the US boom (which, incidentally, corresponded to an unprecedented period of macroeconomic stabilization and other challenges for the euro zone, including the final push to meet the Maastricht fiscal and inflation criteria, the launch of the euro and the creation of the ECB). Only taking 1997 as the base year does US trend productivity growth come in faster than that of the euro zone. It is quite telling that most of the major US macroeconomic imbalances more or less date from this period, and have not been corrected for even despite the recession and the rapid appearance of yet another major imbalance: the large US budget deficit. In essence, US economic managers used their accumulated macroeconomic flexibility to engineer a relatively shallow and short recession, but only at the price of further magnifying their economy’s macroeconomic disequilibria, thus making the international economy far more imbalanced than at any time since the mid-1980s. However, it should be stressed that this fact is not new –thus relieving the recent Timbro report of much of its intended drama of demonstrating that Germany is no richer than Arkansas, the US’s fourth poorest state–. Perhaps more drama would be provided by the data on Arkansas’s Gini coefficient, its poverty and crime rates –or for that matter, by the same data from the other 46 richer US states–. 64.233.167.104
