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Thursday, June 21, 2007

Will "The Productivity Miracle of the 1990s" Continue?

In this Economic Scene column, Austan Goolsbee discusses a paper by Nick Bloom, Raffaella Sadun and John Van Reenen and uses the results to argue against any move toward increased protectionist measures:

How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantage, by Austan Goolsbee, Economic Scene, NY Times: Americans’ anxiety level over competitiveness with other nations has grown in recent years. A large number of Americans appear to believe that the United States will not be able to succeed in an open world market, and they argue in favor of reducing our exposure to the outside. ...

For all the collective hand-wringing, the United States is still home to the most productive workers of all the major economies... Granted it started from the pole position, but the United States still kept the lead in what some economists have come to call the productivity miracle of the 1990s.

Normally, because it is easier to copy someone else’s innovation than to generate new ideas, as countries get richer and more productive, their growth rates slow. Other countries may have much faster growth than the United States, but once their income gets close to ours, their growth slows substantially. This is the law of convergence.

The data has mostly backed up the notion of convergence among rich countries for decades. 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, of course, pointed to information technology and, specifically, to the fact that the price of semiconductors began falling at an even more rapid rate ... starting in the 1990s. ... 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 at the London School of Economics. ... He said that 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.

His paper “Americans Do I.T. Better: U.S. Multinationals and the Productivity Miracle,” (with Nick Bloom ... and Raffaella Sadun ...) looked at the experience of companies in Britain that were taken over by multinational companies with headquarters in other countries. ... [I]n the huge service sectors — financial services, retail trade, wholesale trade — they found compelling evidence ... that. ... [w]hen 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. ...

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...

But there is a chance that the 1990s represent a fundamental shift in the global economy. Perhaps the greater amount of uncertainty and churn in the world economy in the 1990s is the new norm. Perhaps the 21st century will continually favor those who adjust best to changes. As Professor Van Reenen put it, “If the world has become one in which everyone is trying to hit a moving target, it certainly helps to be the best at changing one’s aim.”

But that is, of course, the paradox of the American position. We hate experiencing major adjustments ... 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. ...

I agree that the disutility of "experiencing major adjustments" needs to be considered and minimized to avoid the rise of protectionist sentiment. But an issue that isn't mentioned, the distribution of the gains from trade and from technologically induced structural change, is also part of the political forces driving the opposition to trade liberalization. If faster response to change means that losers from the adjustment process are churned out more quickly, the politics will continue to build against globalization.

[Hal Varian also looks at work by Nick Bloom, Raffaella Sadun and John Van Reenen in an Economic Scene from January 2006, and he talks a little more about some of the reasons why U.S. companies might have an advantage in making using of information technology.]

    Posted by on Thursday, June 21, 2007 at 03:42 AM in Academic Papers, Economics, Technology | Permalink  TrackBack (1)  Comments (52)


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    Did the IT surge cause the 1990s productivity boom? The only problem is, the explanation doesn’t work, according to John Van Reenen at the London School of Economics. ... He said that the prices of information technology fell in Europe, too. And Europe... [Read More]

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