America basks in new golden age of productivity ­ but does it add up?

The roaring computer market may be distorting the real truth about the recent US boom
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The Independent Online

THE US economy is not just growing, and growing fast: it is growing without inflation. The reason is a massive rise in productivity. That, roughly, is the theory that lies behind the euphoria Wall Street felt last week when new figures helped to persuade traders an interest- rate rise does not necessarily lie just round the corner.

THE US economy is not just growing, and growing fast: it is growing without inflation. The reason is a massive rise in productivity. That, roughly, is the theory that lies behind the euphoria Wall Street felt last week when new figures helped to persuade traders an interest- rate rise does not necessarily lie just round the corner.

That is also the great hope for those who see the US economy as reborn. But the idea is still on shaky ground, some economists say; they don't see the step-change optimists believe has revolutionised America.

The immediate cause for celebration was that the Labor Department reported productivity exploded in the third quarter, rising at an annual rate of 4.2 per cent. That means workers produced more goods for fewer hours. Wage costs were also steady, so the US was producing more for less cash.

The brightest hopes are for the trend in productivity. After decades when productivity was dropping, it now seems to be rising steadily. That means America can pay itself more with less inflationary risk; it means the country is becoming more internationally competitive; and it means something is happening in industry that could help boost the long-term growth of the economy.

The revised figures show US productivity grew at an annual rate of 2.9 per cent between 1959 and 1973. But between 1973 and 1995, growth slowed to about 1.5 per cent a year ­ higher than previously estimated, but still a marked decline. The causes of that decline have long been raked over.

Now the debate has switched, because the trend changed sharply in 1995. From the third quarter of that year until now productivity growth has averaged 2.6 per cent ­ back to the golden age. "This is not just some loose statistic that matters only to the Federal Reserve, the Treasury and Wall Street economists," said President Bill Clinton. "It is the key to rising pay checks and greater security and opportunity for ordinary Americans."

It certainly does matter to Wall Street and the Federal Reserve, because it means ­ if true ­ that America can have faster non-inflationary growth. Alan Greenspan, the Fed chairman, has started to embrace this idea recently, most notably in a speech in Florida last month.

"The veritable avalanche of real-time data has facilitated a marked reduction in the hours of work required per unit of output and a broad expansion of newer products whose output has absorbed the workforce no longer needed to sustain the previous level and composition of production," he said.

The result in the past five years has been a major acceleration in productivity and, as a consequence, a marked increase in standards of living for the average American household. The motor was information, and the mechanisms were manifold, he said: inventory safety stocks could be reduced; workers did not need to be laid off and rehired to cope with surges and slumps in demand; delivery lead times had fallen; the size of the capital structure needed to produce a given amount of goods was smaller; and intermediate production and distribution processes were reduced in scale or eliminated.

"In short, information technology raises output per hour in the total economy by reducing hours worked on activities needed to guard productive processes against the unknown and the unanticipated."

Mr Greenspan, not a credulous man, noted some problems. As the latest revisions show, there are some dodgy patches in the national accounts, and the new figures may not have eliminated all of them.

"Because we have had episodes of similar improvements in productivity performance that failed to persist, these data, on their own, cannot be relied upon to draw broad conclusions about whether an acceleration in trend productivity is under way," he said. But he added: "Although it still is possible to argue that the evident increase in productivity growth is ephemeral, I find such arguments hard to believe."

Not everyone is convinced. Productivity does rise when the economy is working faster. Much depends on measuring the two sides of the productivity equation ­ output and hours ­ and neither is easy to pin down. This is a particular problem with services, which increasingly dominate developed economies.

The statistics also depend on how the prices of the outputs are assessed. Earlier this year Jack E Triplett of the Brookings Institution wrote in Business Economics that inadequate measurement in economic statistics "is a problem for understanding exactly the portions of our economy ­ high technology and services ­ that are the rapidly expanding and dynamic sectors". Some of this is simple. Stephen Roach, chief economist at Morgan Stanley Dean Witter, told The New York Times his employer tells the Labor Department he has a 40-hour week, although he usually works twice that. "The government has done a terrible job in uncovering the labour effort required to produce all the new output," he said.

That may mean everyone is working harder, but it doesn't necessarily mean they are working more efficiently. Robert Gordon of Northwestern University is another prominent sceptic. " All of this productivity rebound can be explained by three factors: improved methods for measuring price deflators; the normal procyclical response of productivity in periods like 1997-99 when output grows faster than trend; and the explosion of output and productivity growth in durable goods, entirely due to the production of computers.

"There has been no productivity growth acceleration in the 99 per cent of the economy outside the sector that manufactures computer hardware, beyond that which can be explained by price remeasurement and by a normal (and modest) procyclical response.

"Far from exhibiting a productivity acceleration, the productivity slowdown in manufacturing has gotten worse; when computers are stripped out of the durable manufacturing sector, there has been a further productivity slowdown in durable manufacturing in 1995-99 as compared to 1972-95, and no acceleration at all in nondurable manufacturing."

A lot is at stake over these numbers. In some respects the question of the next step for US interest rates, or whether the US stock market is overvalued, is the least of it. The implications of the Internet and new technologies for economic growth have received a great deal of acclamation, but not much critical investigation.

A new thinktank that opened its doors in Washington last week ­ the Internet Policy Institute ­ is looking more closely at the impact of the technology. It may help shed some light on an area of the economy that still remains substantially opaque.