Robert J. GordonRobert J. Gordon

Northwestern University and NBERNorthwestern University and NBER

AEA Session, ChicagoAEA Session, Chicago

January 6, 2007January 6, 2007

Comments on: “A Comments on: “A Retrospective Look at the U.S. Retrospective Look at the U.S.

Productivity Growth Productivity Growth Resurgence” by J-H-SResurgence” by J-H-S

A Reunion of ProductivityA Reunion of ProductivityResearchers “Ten Years After”Researchers “Ten Years After”

Honor and privilege to discuss this paperHonor and privilege to discuss this paper An extra honor to be at this podium with An extra honor to be at this podium with

so many of the people who have made so many of the people who have made macro productivity research “happen” macro productivity research “happen” over the past decadeover the past decade

The new paper by J-H-S is unique by The new paper by J-H-S is unique by retracing how we learned what we retracing how we learned what we learned and when about the post-1995 learned and when about the post-1995 revival. revival.

Before Reviewing Their HistoryBefore Reviewing Their HistoryLet’s Look at the NumbersLet’s Look at the Numbers

What You’re About to SeeWhat You’re About to See 1955-2006 Change in NFPB Output per Hour1955-2006 Change in NFPB Output per Hour Actual: 8 quarter percent changeActual: 8 quarter percent change Trend: Average of Two Trends Estimated Trend: Average of Two Trends Estimated

from Actual 1-quarter changefrom Actual 1-quarter change Hodrick-Prescott with 6400 smoothing parameterHodrick-Prescott with 6400 smoothing parameter Kalman with similar smoothing parameter but Kalman with similar smoothing parameter but

filtering out influence of current and four lagged filtering out influence of current and four lagged changes in GDP gapchanges in GDP gap

8-quarter Actual LP Change8-quarter Actual LP Changevs. the Average Trend (through vs. the Average Trend (through

2006:Q4)2006:Q4)

-2

-1

0

1

2

3

4

5

6

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Hints of Disagreement Hints of Disagreement Even in the IntroductionEven in the Introduction

J-H-S: “U. S. Productivity Growth has J-H-S: “U. S. Productivity Growth has remained very robust through 2005, but the remained very robust through 2005, but the sources have changed”sources have changed”

In contrast, Actual U. S. Productivity Growth In contrast, Actual U. S. Productivity Growth has Exhibited a Sharp Downshifthas Exhibited a Sharp Downshift 10 Quarters 2001:Q4-2004:Q2 3.6510 Quarters 2001:Q4-2004:Q2 3.65 10 Quarters 2004:Q2-2006:Q4 1.6810 Quarters 2004:Q2-2006:Q4 1.68 Coming March 07 employment revision will reduce Coming March 07 employment revision will reduce

the 1.68 to 1.44, well below the 1995 value of the the 1.68 to 1.44, well below the 1995 value of the trendtrend

Which is Most Relevant for the Next 10 Years?Which is Most Relevant for the Next 10 Years?

The J-H-S History is Fascinating, The J-H-S History is Fascinating, Here are Some of the Most Here are Some of the Most

Interesting Aspects Interesting Aspects Between early 1997 and early 2001 the CBO more Between early 1997 and early 2001 the CBO more

than doubled its 10-year forecast of NFB than doubled its 10-year forecast of NFB productivity growth from 1.2 to 2.7 percentproductivity growth from 1.2 to 2.7 percent

Note that the trend using current data was Note that the trend using current data was already 1.8 by 1995:Q4, so part of the subsequent already 1.8 by 1995:Q4, so part of the subsequent CBO changes were driven by data revisions CBO changes were driven by data revisions

J-H-S detail how productivity growth J-H-S detail how productivity growth for the year for the year 1996 1996 was revised in steps from 0.8 in early 1997 was revised in steps from 0.8 in early 1997 to 2.7 in the latest datato 2.7 in the latest data Important to note that revisions in the late 1990s were Important to note that revisions in the late 1990s were

mainly upwards and revisions since 2002 have been mainly upwards and revisions since 2002 have been mainly downwards, with more to come mainly downwards, with more to come

Rewind to Chicago AEARewind to Chicago AEAMeetings January 1998Meetings January 1998

Everybody including Jack Triplett, not to Everybody including Jack Triplett, not to mention me, was still talking about the mention me, was still talking about the Solow paradoxSolow paradox

Nobody was talking about the productivity Nobody was talking about the productivity growth revival, when and whygrowth revival, when and why

Yet Yet Business Week Business Week had seen it coming in had seen it coming in late 1995, not to mention Alan late 1995, not to mention Alan Greenspan’s wise remarks in 1996Greenspan’s wise remarks in 1996

As late as June 1998 in a paper quoted by As late as June 1998 in a paper quoted by J-H-S, I was still trying to argue that “there J-H-S, I was still trying to argue that “there is something wrong with the computers”.is something wrong with the computers”.

Perceptions Totally Perceptions Totally Changed between mid 1998 and Changed between mid 1998 and

mid 1999mid 1999 My first decomposition (still on my web site) June 14, My first decomposition (still on my web site) June 14,

19991999 Then-available data showed an acceleration from 1.13 Then-available data showed an acceleration from 1.13

in 1972:Q2-1995:Q4 to 2.15 in 1995:Q4-1999:Q1in 1972:Q2-1995:Q4 to 2.15 in 1995:Q4-1999:Q1 (Current data 1.45 to 2.53)(Current data 1.45 to 2.53)

Of the 1.02 acceleration, I divided it in thirdsOf the 1.02 acceleration, I divided it in thirds TFP contribution of computers, price measurement revisions, TFP contribution of computers, price measurement revisions,

cyclical effectcyclical effect Upward revisions in October 1999 weakened my conclusion, Upward revisions in October 1999 weakened my conclusion,

and my subsequent work shows there was no cyclical effect and my subsequent work shows there was no cyclical effect 1995-991995-99

Price measurement revisions largely eliminated by benchmark Price measurement revisions largely eliminated by benchmark NIPA revision of October, 1999NIPA revision of October, 1999

Mea Culpa Mea Culpa Vintage 2000Vintage 2000

My published 2000 paper cited by J-H-S My published 2000 paper cited by J-H-S recognized both increased TFP in IT recognized both increased TFP in IT manufacturing and the effect of capital manufacturing and the effect of capital deepeningdeepening

But still no structural acceleration in non-IT But still no structural acceleration in non-IT TFP, due to a large cyclical effect that in TFP, due to a large cyclical effect that in retrospect wasn’t thereretrospect wasn’t there

For 1995-2000 my 2006 paper fully For 1995-2000 my 2006 paper fully endorses the 2006 decompositions of endorses the 2006 decompositions of Oliner-Sichel and J-H-S.Oliner-Sichel and J-H-S.

What are Those CurrentWhat are Those CurrentDecompositions of IT Role?Decompositions of IT Role?

Acceleration 1973-95 to 1995-2000 (or 01)Acceleration 1973-95 to 1995-2000 (or 01) IT Share O-S 112 percentIT Share O-S 112 percent IT Share J-H-S current paper 78 percentIT Share J-H-S current paper 78 percent

Acceleration 1995-2000 (or 01) to 2000-2005Acceleration 1995-2000 (or 01) to 2000-2005 IT Share O-S -80 percentIT Share O-S -80 percent IT Share J-H-S current paper -146 percentIT Share J-H-S current paper -146 percent

Something is fishy here – how could there be any Something is fishy here – how could there be any fundamental connection between IT investment and fundamental connection between IT investment and productivity growth?productivity growth?

This raises the issues from my 2004 paper that J-H-S have This raises the issues from my 2004 paper that J-H-S have already summarizedalready summarized Was there a one-shot character to the IT boom of the late Was there a one-shot character to the IT boom of the late

1990s?1990s? What caused the post-2000 upsurge of labor productivity in the What caused the post-2000 upsurge of labor productivity in the

wake of a collapse in IT investmentwake of a collapse in IT investment

What Was Unique about 1995-What Was Unique about 1995-2000: Computer 2000: Computer

Prices and the IT SharePrices and the IT Share The chart for the rate of decline of computer The chart for the rate of decline of computer

prices shows the distinctly one-shot nature of the prices shows the distinctly one-shot nature of the late 1990s boomlate 1990s boom

The chart for the share of IT investment in GDP The chart for the share of IT investment in GDP shows the same thingshows the same thing

This raises profound questions:This raises profound questions: What has happened to Moore’s Law? (J-H-S assume What has happened to Moore’s Law? (J-H-S assume

continues at rate between 1995-2000 and post-2000)continues at rate between 1995-2000 and post-2000) Is the 1995-2000 period even Is the 1995-2000 period even relevantrelevant for projections for projections

out to 2015 or 2025?out to 2015 or 2025? What caused the 2000-04 acceleration and is that period What caused the 2000-04 acceleration and is that period

relevant for future projections?relevant for future projections?

Inflation Rates, BEA Deflators for Inflation Rates, BEA Deflators for Computer Hardware and Computer Hardware and

ICT Equip & Software, 1965-2006ICT Equip & Software, 1965-2006

-35

-30

-25

-20

-15

-10

-5

0

5

10

1965-I 1970-I 1975-I 1980-I 1985-I 1990-I 1995-I 2000-I 2005-I

Computers and Peripherals

ICT Equipment and Software

Nominal Share of ICT Hardware Nominal Share of ICT Hardware and Software Investment in GDP, and Software Investment in GDP,

1965-20061965-2006

0

1

2

3

4

5

6

1965-I 1970-I 1975-I 1980-I 1985-I 1990-I 1995-I 2000-I 2005-I

Hypotheses Reviewed byHypotheses Reviewed byJ-H-SJ-H-S

Cyclical Dynamics (RJG, Sichel)Cyclical Dynamics (RJG, Sichel) Increased Competitive Pressures in ITIncreased Competitive Pressures in IT Technical Progress Outside ITTechnical Progress Outside IT Spillovers from IT as a GPTSpillovers from IT as a GPT Unmeasured Investments in R&D and Unmeasured Investments in R&D and

Organizational ChangeOrganizational Change Intangible Capital (Corrado, Hulten, Sichel)Intangible Capital (Corrado, Hulten, Sichel) Authors Take No Position and indeed provide Authors Take No Position and indeed provide

no citations for several of these hypothesesno citations for several of these hypotheses

My 2003 BPEA Paper My 2003 BPEA Paper Proposed Three ExplanationsProposed Three Explanations

Cyclical DynamicsCyclical Dynamics Productivity Always Grows Fastest in the Early Part of the Productivity Always Grows Fastest in the Early Part of the

ExpansionExpansion Due to the Lag of Hours Behind OutputDue to the Lag of Hours Behind Output ““Early Recovery Productivity Bubble”Early Recovery Productivity Bubble”

Savage Corporate Cost Cutting, Elements Unique to Savage Corporate Cost Cutting, Elements Unique to 2001-03 (compare to 1991-93), many citations to 2001-03 (compare to 1991-93), many citations to NordhausNordhaus Collapse of stock market and profitsCollapse of stock market and profits Restatement of profits due to accounting scandalsRestatement of profits due to accounting scandals Sharp divergence NIPA profits from S&P Profits 1997-2000Sharp divergence NIPA profits from S&P Profits 1997-2000 Extremely low ratio 2001-02 of S&P Reported Earnings to Extremely low ratio 2001-02 of S&P Reported Earnings to

S&P Operating Earnings (One-time charges)S&P Operating Earnings (One-time charges) Much higher ratio of executive compensation based on Much higher ratio of executive compensation based on

stock options, hence pressure to boost share price by stock options, hence pressure to boost share price by cutting costscutting costs

Third Explanation, Delay Third Explanation, Delay and Intangible Capitaland Intangible Capital

O-S and J-H-S Growth Accounting Requires that Full O-S and J-H-S Growth Accounting Requires that Full Productivity Payoff from Computers Occurs the Instant Productivity Payoff from Computers Occurs the Instant they Are Produced, before they are even Installedthey Are Produced, before they are even Installed

Basu Basu et. Al. et. Al. and Yang-Brynjolfsson have emphasized and Yang-Brynjolfsson have emphasized complementary, unmeasured, and delayed complementary, unmeasured, and delayed investments in intangible capital (including reorg, new investments in intangible capital (including reorg, new business practices, general acquisition of human business practices, general acquisition of human capital)capital)

Makes sense that a big invention, the late 90s Makes sense that a big invention, the late 90s marriage of computers and communication, would marriage of computers and communication, would take time to have its full prody impacttake time to have its full prody impact My favorite example, airport check-in e-kiosksMy favorite example, airport check-in e-kiosks Immelt of GE and Chambers of Cisco, “learning curve 3, 5, Immelt of GE and Chambers of Cisco, “learning curve 3, 5,

even 7 years”even 7 years”

My Conclusions About the My Conclusions About the Relevance of 1995-2000 and 2000-Relevance of 1995-2000 and 2000-

0404 The ICT boom of 1995-2000 was a unique event The ICT boom of 1995-2000 was a unique event

created by the invention of the internet. The fast created by the invention of the internet. The fast decline in computer prices and high share of ICT decline in computer prices and high share of ICT investment will not happen againinvestment will not happen again

The full productivity payoff of the ICT investment The full productivity payoff of the ICT investment bubble plausibly had a lag of three years or more, bubble plausibly had a lag of three years or more, same timing as cost cuttingsame timing as cost cutting

Thus fast productivity and slow employment Thus fast productivity and slow employment growth in 2001-03 were flip sides of the two big growth in 2001-03 were flip sides of the two big explanations, cost-cutting and intangible delayexplanations, cost-cutting and intangible delay

Layered on top of a standard cyclical early Layered on top of a standard cyclical early recovery bubblerecovery bubble

Where Then Does that Leave Us?Where Then Does that Leave Us?

We can’t base future projections on simple We can’t base future projections on simple averages that are dominated by 1995-2004averages that are dominated by 1995-2004

We should pay attention to what’s happening to We should pay attention to what’s happening to the trend as the actual numbers after 2004:Q2 the trend as the actual numbers after 2004:Q2 roll inroll in

Cyclical “Payback is Complete”: Excess of Actual Cyclical “Payback is Complete”: Excess of Actual > Trend LP Growth 01:Q4-04:Q2 now has been > Trend LP Growth 01:Q4-04:Q2 now has been completely offset by Actual < Trend 04:Q2 – completely offset by Actual < Trend 04:Q2 – 06:Q406:Q4

Any further actual numbers < trend will pull down Any further actual numbers < trend will pull down the trendthe trend

My current trend of 2.34 is below J-H-S projection My current trend of 2.34 is below J-H-S projection out ten years from nowout ten years from now

Important Extra ElementImportant Extra Elementin Future Forecastsin Future Forecasts

J-H-S have been predicting for years J-H-S have been predicting for years that growth in labor quality will slow that growth in labor quality will slow to near-zero in the futureto near-zero in the future

Their current estimates are different:Their current estimates are different: 1973-95 0.251973-95 0.25 1995-2000 0.191995-2000 0.19 2000-2005 0.36 (Why?)2000-2005 0.36 (Why?) 2005-2015 0.152005-2015 0.15

Last Slide, Let’s Summarize their Last Slide, Let’s Summarize their Projections in Table 3 Projections in Table 3 as Compared to Mineas Compared to Mine

Labor Productivity GrowthLabor Productivity Growth Base-Case J-H-S 2.49 percent over 10 yearsBase-Case J-H-S 2.49 percent over 10 years Gordon 2.1 percent over 25 yearsGordon 2.1 percent over 25 years

Potential GDP GrowthPotential GDP Growth Can’t Find J-H-S estimate of Total GDP Productivity (I Can’t Find J-H-S estimate of Total GDP Productivity (I

assume 0.4 slower than NFPB)assume 0.4 slower than NFPB) Since hours growth projection is about the same as Since hours growth projection is about the same as

mine, their implied potential GDP projection is 2.9 mine, their implied potential GDP projection is 2.9 compared to my 2.5compared to my 2.5

As As The EconomistThe Economist reported on Oct. 28, current reported on Oct. 28, current American potential GDP growth already is slower American potential GDP growth already is slower than at any point in its recorded history and will than at any point in its recorded history and will slow furtherslow further

And That’s the News And That’s the News from Lake Wobegonfrom Lake Wobegon

Oops, sorry . . .Oops, sorry . . . and that’s the news from Lake and that’s the news from Lake

MichiganMichigan where the productivity pundits are where the productivity pundits are

pessimisticpessimistic their wives are good-lookingtheir wives are good-looking and all the the weather is above and all the the weather is above

average average