Two Centuries of Economic Two Centuries of Economic Growth: Europe ChasingGrowth: Europe Chasing

the American Frontierthe American Frontier

Robert J. GordonRobert J. Gordon

Northwestern UniversityNorthwestern University

MIT Macro Seminar, April 26, 2005MIT Macro Seminar, April 26, 2005

22

Outline of the Two PapersOutline of the Two Papers Paper #1, “Why is Europe so Productive yet so Paper #1, “Why is Europe so Productive yet so

Poor?”Poor?”– Interpretation of falling Interpretation of falling relativerelative hours per capita in hours per capita in Europe vs. U. S.Europe vs. U. S.– Major hypothesis: only a Major hypothesis: only a small portionsmall portion of falling relative of falling relative

hours per capita represents welfare value of leisurehours per capita represents welfare value of leisure– Audacious claim that U. S. PPP GDP per capita overstates Audacious claim that U. S. PPP GDP per capita overstates

U. S. welfare advantageU. S. welfare advantage Like a fine wine, Paper #1 has been fermentingLike a fine wine, Paper #1 has been fermenting Seminar will have data, references, and Seminar will have data, references, and

interpretations that are go well beyond the interpretations that are go well beyond the written versionwritten version

33

Paper #2, Economic HistoryPaper #2, Economic HistoryRevisitedRevisited

Why did Europe fall Behind?Why did Europe fall Behind? Unique point of viewUnique point of view

– Divided by epoch: 1870-1913, 1913-50, Divided by epoch: 1870-1913, 1913-50, 1950+1950+

– Divided by reason: Pre-1913 the “USE” Divided by reason: Pre-1913 the “USE” DeviceDevice

– Post-1913: Exploiting the Great Post-1913: Exploiting the Great InventionsInventions

Rewriting the “Stanford Economic Rewriting the “Stanford Economic History”: Abramovitz, David, WrightHistory”: Abramovitz, David, Wright

44

Post-1995: Europe Stops Post-1995: Europe Stops Catching Up, Falls Behind Catching Up, Falls Behind

AgainAgain Comes at end of Paper #2, links both Comes at end of Paper #2, links both

paperspapers Since 1995, Europe has fallen back Since 1995, Europe has fallen back

on Productivity but started a tiny on Productivity but started a tiny recovery in Hours per Capitarecovery in Hours per Capita– Why the Role of IT was ExaggeratedWhy the Role of IT was Exaggerated– Has the Role of Retailing Been Has the Role of Retailing Been

Exaggerated?Exaggerated?– Enduring U. S. AdvantagesEnduring U. S. Advantages

55

Back to Part #1:Back to Part #1:What are the Substantive What are the Substantive

IssuesIssues ““Why is Europe so Productive yet so Why is Europe so Productive yet so

Poor?”Poor?” Superficial Answer: H/N has been Superficial Answer: H/N has been

fallingfalling Why?Why?

– Blanchard (Blanchard (JEP, JEP, p. 4): “The main difference p. 4): “The main difference is that Europe has used some of the is that Europe has used some of the increase in productivity to increase leisure increase in productivity to increase leisure rather than income, while the United States rather than income, while the United States has done the opposite.” has done the opposite.”

66

An Opposing ViewAn Opposing View

By definition the decline in Europe’s Y/N By definition the decline in Europe’s Y/N related to Y/H can be divided into:related to Y/H can be divided into:– Decline in relative H/E (35% 1960-95)Decline in relative H/E (35% 1960-95)– Decline in relative E/N (65% 1960-95)Decline in relative E/N (65% 1960-95)

Voluntary Leisure?Voluntary Leisure?– Some of decline in H/E is not voluntarySome of decline in H/E is not voluntary– Most of decline in E/N is not voluntaryMost of decline in E/N is not voluntary

New References for Welfare New References for Welfare InterpretationInterpretation– Freeman-Schettkat (2005) & Alesina (2005)Freeman-Schettkat (2005) & Alesina (2005)

77

Part #1: Part #1: What are the Data Issues?What are the Data Issues?

How to Compare Europe GDP vs. US GDPHow to Compare Europe GDP vs. US GDP Thanks to Peter Neary AER Dec 2004:Thanks to Peter Neary AER Dec 2004:

– Geary vs. EKS vs. “QUAIDS”Geary vs. EKS vs. “QUAIDS” Alternative methods of converting Ypc to Alternative methods of converting Ypc to

international PPPinternational PPP– Maddison and PWT use Geary-KhamisMaddison and PWT use Geary-Khamis– OECD and Eurostat use EKS (EltetOECD and Eurostat use EKS (Eltetö, Köves, and ö, Köves, and

Szulc), a multilateral extension of Fisher Szulc), a multilateral extension of Fisher “ideal”“ideal”

– Groningen web site gives bothGroningen web site gives both

88

An Operational ProcedureAn Operational Procedure

My calculations from Neary for EU-15 / US My calculations from Neary for EU-15 / US 19801980– Neary preferred QUAIDS = 74.3Neary preferred QUAIDS = 74.3– GK 71.4, EKS 77.5GK 71.4, EKS 77.5– Average Groningen GK and EKS = 74.4Average Groningen GK and EKS = 74.4

Hence all charts from here on use average Hence all charts from here on use average of GK & EKSof GK & EKS

This applies only to GDP, not to This applies only to GDP, not to population, hours, employment, labor population, hours, employment, labor forceforce

99

Other Data IssuesOther Data Issues

Hedonic Price Indexes: Data Hedonic Price Indexes: Data Noncomparable?Noncomparable?

Studies for Germany show difference Studies for Germany show difference in AAGR productivity of ~0.2in AAGR productivity of ~0.2

Some EU countries use hedonics for Some EU countries use hedonics for computers so overall EU difference computers so overall EU difference would be lesswould be less

More interesting: Overstatement of More interesting: Overstatement of U.S. GDP (energy, prisons, disperson)U.S. GDP (energy, prisons, disperson)

1010

A Preview of A Preview of ALL THESE ALL THESE SLIDESSLIDES

Slides of Europe vs. U. S., 1820-2004 for Slides of Europe vs. U. S., 1820-2004 for Y/N, 1870-2004 for Y/HY/N, 1870-2004 for Y/H

Maddison through 1950, ratio-linked to Maddison through 1950, ratio-linked to Groningen 1950+, average GK and EKSGroningen 1950+, average GK and EKS– Maddison piecewise loglinear trends. Years for Maddison piecewise loglinear trends. Years for

Y/N: 1820, 1870, 1913, 1923, 1929, 1941, Y/N: 1820, 1870, 1913, 1923, 1929, 1941, 19501950

– Y/H 1870, 1913, 1929, 1938, 1950Y/H 1870, 1913, 1929, 1938, 1950 Each slide, a wide angle back to the start, Each slide, a wide angle back to the start,

then a “close-up” 1960-2004then a “close-up” 1960-2004 Ratios, then Ratios of RatiosRatios, then Ratios of Ratios

1111

The Broad Sweep of 2 The Broad Sweep of 2 Centuries:Centuries:

Income per CapitaIncome per Capita

1000

10000

100000

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Europe - 15

United States

1212

Since 1960: Europe Fails Since 1960: Europe Fails to Converge and then Falls to Converge and then Falls

BehindBehind

1000

6000

11000

16000

21000

26000

31000

36000

1960 1965 1970 1975 1980 1985 1990 1995 2000

Europe - 15

United States

1313

Productivity since 1870:Productivity since 1870:Almost Catching Up is Not Almost Catching Up is Not

EnoughEnough

1

10

100

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Europe - 15

United States

1414

Productivity Post-1960:Productivity Post-1960:The Ratio Reaches 96.9% in The Ratio Reaches 96.9% in

19951995

0

5

10

15

20

25

30

35

40

45

1960 1965 1970 1975 1980 1985 1990 1995 2000

Europe - 15

United States

1515

The Europe / US Ratios The Europe / US Ratios Are Much More DramaticAre Much More Dramatic

0

20

40

60

80

100

120

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Output per hourOutput per capita

1616

The Ratios Again:The Ratios Again:A Post-1960 Close-upA Post-1960 Close-up

40

50

60

70

80

90

100

110

1960 1965 1970 1975 1980 1985 1990 1995 2000

Output per hour

Output per capita

1717

Ratios of Ratios:Ratios of Ratios:The Real Clue to What is Going The Real Clue to What is Going

OnOn

60

70

80

90

100

110

120

130

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Hours per employee

Employee to population ratio

Output per capita tooutput per hour ratio

1818

Ratios of Ratios: Ratios of Ratios: The Post-1960 Close-upThe Post-1960 Close-up

60

70

80

90

100

110

120

130

1960 1965 1970 1975 1980 1985 1990 1995 2000

Hours per employee

Employee to population ratio

Output per capita tooutput per hour ratio

1919

What are the NumbersWhat are the Numbersthat Go with these Lines?that Go with these Lines?

  (Y/N) / (Y/H) H/E E/N

       

1960 119.8 102.4 115.9

1995 73.6 87.1 85.6

2004 77.1 85.4 91.7

       

% Log Change    

1960-1995 -48.6 -16.1 -30.3

1960-2004 -44.1 -18.1 -23.4

2020

Hours per Employee Declined Hours per Employee Declined in Tandem until 1970, then in Tandem until 1970, then

divergeddiverged

0

500

1000

1500

2000

2500

3000

3500

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Europe - 15

United States

2121

A Close-up of Hours per A Close-up of Hours per EmployeeEmployeeafter 1960after 1960

1400

1500

1600

1700

1800

1900

2000

2100

2200

1960 1965 1970 1975 1980 1985 1990 1995 2000

Europe - 15

United States

2222

Employment per CapitaEmployment per Capitaback to 1870back to 1870

30%

35%

40%

45%

50%

55%

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Europe - 15

United States

2323

Employment per Capita after Employment per Capita after 1960:1960:

U.S. Women and Teens U.S. Women and Teens Marched Off to Work 1965-Marched Off to Work 1965-

19901990

30%

35%

40%

45%

50%

55%

1960 1965 1970 1975 1980 1985 1990 1995 2000

Europe - 15

United States

2424

An Outline of Issues for An Outline of Issues for DiscussionDiscussion

Europe’s failure to converge is not just a Europe’s failure to converge is not just a matter of voluntary vacationsmatter of voluntary vacations

Much more of the change 1960-95 was the Much more of the change 1960-95 was the decline in employment per capitadecline in employment per capita

Even lower hours are not entirely Even lower hours are not entirely voluntaryvoluntary– ““If the French really wanted to work only 35 If the French really wanted to work only 35

hours, why do they need the hours police?”hours, why do they need the hours police?”– Alesina: Alesina:

Short hours are a victory for unions and Short hours are a victory for unions and parliamentary politics, not for free choiceparliamentary politics, not for free choice

So is early retirement, a major source of falling E/NSo is early retirement, a major source of falling E/N

2525

What Matters for Welfare is Y/NWhat Matters for Welfare is Y/N + Differential Leisure, not Y/H + Differential Leisure, not Y/H

Europeans have “bought” their high Europeans have “bought” their high productivity ratio with every productivity ratio with every conceivable way of making labor conceivable way of making labor expensiveexpensive– High marginal tax rates (payroll and High marginal tax rates (payroll and

income taxes)income taxes)– Firing restrictionsFiring restrictions– Early retirement (55! 58!) with pensions Early retirement (55! 58!) with pensions

paid for by working peoplepaid for by working people– Lack of encouragement of market Lack of encouragement of market

involvement by teens and youthinvolvement by teens and youth

2727

The Decline in Europe’s E/N The Decline in Europe’s E/N Matters more than H/EMatters more than H/E

First, which age groups are suffering First, which age groups are suffering from higher unemployment in Europe?from higher unemployment in Europe?

Second, which age groups experience Second, which age groups experience lower labor force participation in Europe?lower labor force participation in Europe?

Third, how does it come together in the Third, how does it come together in the distribution of low E/N by age group?distribution of low E/N by age group?

Note: These graphs are for total Note: These graphs are for total population by age and blur male/female population by age and blur male/female differences.differences.

2828

Leisure? Leisure? Unemployment by AgeUnemployment by Age

Unemployment by age

0

5

10

15

20

25

total >15 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74

2929

The “Peaked Hump” in The “Peaked Hump” in European LFPREuropean LFPR

0

10

20

30

40

50

60

70

80

90

total 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74

3030

Putting it Together:Putting it Together:E/N by AgeE/N by Age

Employment rates

0

10

20

30

40

50

60

70

80

90

total 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74

3131

Decomposing the EU/US Decomposing the EU/US Difference Difference

in the E/N Ratioin the E/N Ratio

age distribution unemployment LFPR E/N ratio

EU EU EU 87.14

US EU EU 86.19

EU US EU 91.23

EU EU US 97.11

US US EU 90.77

EU US US 102.1

3232

Welfare Aspects of E/NWelfare Aspects of E/Nby Age Groupby Age Group

Youth enter late into Market EmploymentYouth enter late into Market Employment If we are assessing extra European If we are assessing extra European

“leisure”, how much if any credit do we “leisure”, how much if any credit do we give to youth? give to youth? – Disconnected from the market economyDisconnected from the market economy– American youth are expected to workAmerican youth are expected to work

Link with government support of higher Link with government support of higher education: tuition grants in Europe vs. education: tuition grants in Europe vs. peer-reviewed research grants in US peer-reviewed research grants in US – Plus state university subsidiesPlus state university subsidies

3333

The Welfare Effect of EarlyThe Welfare Effect of EarlyRetirement: Back-of-Envelope Retirement: Back-of-Envelope

HandoutHandout

Baseline: work age 20-65, retire 65-84Baseline: work age 20-65, retire 65-84 No saving, investmentNo saving, investment 30% tax finances pay-as-you-go pensions 30% tax finances pay-as-you-go pensions

with balanced govt budgetwith balanced govt budget– Tax finances equality of consumption in Tax finances equality of consumption in

retirement to consumption during work yearsretirement to consumption during work years Alternative retirement age at 55 requires Alternative retirement age at 55 requires

tax increase to 45.6%, 25.1% decline in tax increase to 45.6%, 25.1% decline in consumption during work years and consumption during work years and retirementretirement

3434

Time Allocation from Time Allocation from Freeman-SchettkatFreeman-Schettkat

Freeman average males & females, Freeman average males & females, workdayworkday

M=market, H=home production, M=market, H=home production, L=leisure, P=personal time (sleep)L=leisure, P=personal time (sleep)

I set P>9.0 as LeisureI set P>9.0 as Leisure

M H L PM H L P

Employed 8.0 2.5 4.5 9Employed 8.0 2.5 4.5 9

Unemployed 1.0 4.5 9.5 9Unemployed 1.0 4.5 9.5 9

3535

Welfare Valuation of LeisureWelfare Valuation of Leisure

Work time is chosen to equate marginal Work time is chosen to equate marginal utility of leisure to after-tax wageutility of leisure to after-tax wage

Diminishing marginal utility of leisureDiminishing marginal utility of leisure– Infra-marginal leisure valued > wageInfra-marginal leisure valued > wage– Extra-marginal leisure valued < wageExtra-marginal leisure valued < wage

Back-of-envelope. Back-of-envelope. – Value weekday and weekend leisure of both Value weekday and weekend leisure of both

workers and retired = 4/3 after-tax wageworkers and retired = 4/3 after-tax wage– Value hours switched from work to retirement Value hours switched from work to retirement

= 2/3 after-tax wage= 2/3 after-tax wage

3636

Welfare calculationWelfare calculation

With 55 retirement age, after-tax With 55 retirement age, after-tax wage is 25% lesswage is 25% less

Extra hours switched from work to Extra hours switched from work to retirement leisure are low-valued (2/3)retirement leisure are low-valued (2/3)

Total welfare = market consumption Total welfare = market consumption plus total value of leisure plus total value of leisure

Market consumption declines 25.1 Market consumption declines 25.1 percent, welfare declines 22.6 percent, welfare declines 22.6 percent, ratio 90% (i.e., leisure offsets percent, ratio 90% (i.e., leisure offsets 10%)10%)

3737

Conclusion about Leisure Conclusion about Leisure OffsetOffset

Europe’s decline in H/E, not all of this is Europe’s decline in H/E, not all of this is voluntary (Alesina)voluntary (Alesina)

Europe’s decline in E/N due to Europe’s decline in E/N due to unemployment and low labor force unemployment and low labor force participation of youth and early retirees, participation of youth and early retirees, virtually no leisure offsetvirtually no leisure offset

Freeman-SchettkatFreeman-Schettkat– Part of difference in H/N represents not leisure but Part of difference in H/N represents not leisure but

household productionhousehold production– German mothers cook at home, American German mothers cook at home, American

mothers go out to eatmothers go out to eat

3838

Turn the Tables on the U. S.:Turn the Tables on the U. S.:The “Disconnect” between The “Disconnect” between

Welfare and PPP-Adjusted GDPWelfare and PPP-Adjusted GDP

GDP Exaggerates U. S. GDP per CapitaGDP Exaggerates U. S. GDP per Capita– Extreme climate, lots of air conditioning, Extreme climate, lots of air conditioning,

low petrol prices, huge excess energy uselow petrol prices, huge excess energy use– U. S. urban sprawl: energy use, congestionU. S. urban sprawl: energy use, congestion– Crime, 2 million in prisonCrime, 2 million in prison

How much is this worth?How much is this worth?

3939

A Shrinking Explanation:A Shrinking Explanation:Declining Btu / GDPDeclining Btu / GDP

200

250

300

350

400

1940 1950 1960 1970 1980 1990 2000 2010

5

10

15

20

25

Btu/GDP

Btu per capita

4040

The EU-US Difference The EU-US Difference is only 2% of GDPis only 2% of GDP

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1980 1985 1990 1995 2000

4141

Other Additions or Subtractions Other Additions or Subtractions

from Europe’s Welfarefrom Europe’s Welfare Urban Congestion? Urban Congestion?

– London vs. NY?London vs. NY?– Paris vs. Chicago?Paris vs. Chicago?– Time spent in London underground vs. in Time spent in London underground vs. in

a Chicago automobile?a Chicago automobile? Prisons, perhaps 1% of GDPPrisons, perhaps 1% of GDP Undeniable U. S. superiority: housingUndeniable U. S. superiority: housing

– People value interior square feet (2X in People value interior square feet (2X in US)US)

– People value exterior land (4X in US)People value exterior land (4X in US)

4242

Putting it Together for 2004Putting it Together for 2004

EU/US Y/N = 68.8EU/US Y/N = 68.8– Average of GK 65.8 and EKS 71.8Average of GK 65.8 and EKS 71.8

EU/US Y/H = 89.2EU/US Y/H = 89.2– Average of GK 85.3 and EKS 93.1Average of GK 85.3 and EKS 93.1

Raise Europe:Raise Europe:– 67% of H/E difference (11.8) is leisure = 7.967% of H/E difference (11.8) is leisure = 7.9– 10% of E/N difference (8.6) = 0.910% of E/N difference (8.6) = 0.9– Half of Energy use difference = 1.0Half of Energy use difference = 1.0– Prisons and other = 1.0Prisons and other = 1.0

Europe’s welfare vs. U. S. = 79.6Europe’s welfare vs. U. S. = 79.6

4343

Paper #2 is the History: Paper #2 is the History: Revising the “Stanford School”Revising the “Stanford School”

Organized by time, pre-1913, 1913-50, Organized by time, pre-1913, 1913-50, 1950+1950+

Within time periods, political union vs. Within time periods, political union vs. other (USE device -- notice footnote 17)other (USE device -- notice footnote 17) – Political union vs. “newness”Political union vs. “newness”– The heavy role of government in creating The heavy role of government in creating

the late 19the late 19thth century U. S. growth miracle century U. S. growth miracle Within time periods, reversible or Within time periods, reversible or

nonreversible?nonreversible?

4444

Political Union: Political Union: Materials-intensive Materials-intensive

manufacturing manufacturing Wright, raw materials Wright, raw materials

– part of political union, not just natural endowment part of political union, not just natural endowment US has advantage in resources vs. individual nations, but US has advantage in resources vs. individual nations, but

not all of Europenot all of Europe No fear of Minnesota and Indiana going to warNo fear of Minnesota and Indiana going to war

– Wright: doesn't emphasize enough ag, transport, Wright: doesn't emphasize enough ag, transport, trade. The “Wells Fargo Wagon” trade. The “Wells Fargo Wagon”

Late 19Late 19thth Century: The Dynamo of Chicago Century: The Dynamo of Chicago– Fastest Growing City in the World: 1871-1929Fastest Growing City in the World: 1871-1929– James Cronon’s “Nature’s Metropolis”James Cronon’s “Nature’s Metropolis”– ““Devil and the White City”Devil and the White City”

4545

But it was not all Political But it was not all Political Union: Even a USE Would Union: Even a USE Would

Have LaggedHave Lagged Clear advantages of the New World (which U. Clear advantages of the New World (which U.

S. uniquely? Which others (C, AU, NZ, S. uniquely? Which others (C, AU, NZ, Argentina?)Argentina?) – AgriculturalAgricultural

Land intensity indirectly responsible for ascendancy of Land intensity indirectly responsible for ascendancy of American manufacturingAmerican manufacturing

– NewnessNewness Common language, self-selection of ambitious immigrants, Common language, self-selection of ambitious immigrants,

high motivation, labor mobilityhigh motivation, labor mobility

– American system of manufacturing (guns, watches, American system of manufacturing (guns, watches, British anquish at Crystal Palace 1851)British anquish at Crystal Palace 1851)

– PolicyPolicy Land for the railroadsLand for the railroads The Homestead Act!The Homestead Act!

4646

Post-1913: Exploiting the great Post-1913: Exploiting the great inventionsinventions

Vs. David-Wright on electricity in 1920s US mfgVs. David-Wright on electricity in 1920s US mfg– Much more emph needed on ICEMuch more emph needed on ICE– Much more emph needed on 1930-50, not just 1920sMuch more emph needed on 1930-50, not just 1920s

Huge US lead in exploiting both electricity and Huge US lead in exploiting both electricity and ICEICE – U. S. in 1929 had 80% of world motor vehicle U. S. in 1929 had 80% of world motor vehicle

productionproduction– U. S. in 1929 had 90% of world motor vehicle U. S. in 1929 had 90% of world motor vehicle

registrationsregistrations No mystery about the “Arsenal of Democracy”No mystery about the “Arsenal of Democracy”

4747

Post-1913: The Great Post-1913: The Great Compression Compression

Created rents for labor, promoted capital-Created rents for labor, promoted capital-labor substitution, reduced low-skill jobs labor substitution, reduced low-skill jobs

ImmigrationImmigration– Restrictive legislation in the 1920sRestrictive legislation in the 1920s– A respite for low-skilled workers (compare now)A respite for low-skilled workers (compare now)

Trade barriersTrade barriers– No importation of low-skilled labor via goods No importation of low-skilled labor via goods

(compare now via China) (compare now via China) New deal pro-union legislationNew deal pro-union legislation

– Pure rents for semi-skilled high-school drop-Pure rents for semi-skilled high-school drop-outsouts

4848

World War IIWorld War II!!The Victory of the ArsenalThe Victory of the Arsenal

The miracle occurred in an ad-hoc The miracle occurred in an ad-hoc system of government loose control system of government loose control over business improvisationover business improvisation

The basis was laid starting with The basis was laid starting with Henry Ford in 1914Henry Ford in 1914

Herbert Hoover did something goodHerbert Hoover did something good Role of the American system and the Role of the American system and the

engineerengineer References: Overy, WaltonReferences: Overy, Walton

4949

Post WWIIPost WWII

France: penetration of electricity and ICE: France: penetration of electricity and ICE: exactly 40 years laterexactly 40 years later– That wonderful Landes quoteThat wonderful Landes quote

Reversal of initial U. S. advantagesReversal of initial U. S. advantages– Raw materials Raw materials – Political union Political union – Newness depreciates Newness depreciates – Reversal of the Great compression Reversal of the Great compression

Did Europe do anything creative except catch up? Did Europe do anything creative except catch up? – Welfare stateWelfare state– Combining auto with public transportCombining auto with public transport

5050

The Great Paradox: The U. S. The Great Paradox: The U. S. FunkFunk

1973-95 followed by1973-95 followed byEuropean Funk after 1995European Funk after 1995

1973-95 Europe continues to exploit great 1973-95 Europe continues to exploit great inventionsinventions– Copies U. S. interhighway system but retains Copies U. S. interhighway system but retains

railroads and builds TGV railroads and builds TGV The teetering U. S. has run into diminishing The teetering U. S. has run into diminishing

returnsreturns– Old inventions, electricity and ICE, fade awayOld inventions, electricity and ICE, fade away– The Solow “computer paradox”The Solow “computer paradox”

1995-2004. Europe's productivity growth 1995-2004. Europe's productivity growth doesn't revive, the great European funk. doesn't revive, the great European funk.

5151

The Diagnosis for the The Diagnosis for the Turnaround:Turnaround:

Basic Paradox about ITBasic Paradox about IT Both Europe and U. S. Rapidly Both Europe and U. S. Rapidly

Adopted New Economy TechnologyAdopted New Economy Technology– Personal ComputersPersonal Computers– Web AccessWeb Access– Mobile PhonesMobile Phones

But Europe hasn’t taken offBut Europe hasn’t taken off Conclusion: Role of IT in U. S. revival Conclusion: Role of IT in U. S. revival

must have been exaggeratedmust have been exaggerated

5252

Output per Hour by Industry Group, EU and US, 1990-2003

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990-1995 1995-2001

US ICT Pro

EU ICT Pro

US ICT Using

EU ICT Using

US Non-ICT

EU Non-ICT

Finding the Culprit Industries

5353

Where is the Difference? Where is the Difference? The Van-Ark DecomposionThe Van-Ark Decomposion

Explaining the difference in Europe Explaining the difference in Europe vs. US productivity growth post-1995vs. US productivity growth post-1995– 55% retail trade55% retail trade– 24% wholesale trade24% wholesale trade– 20% securities20% securities– Rest of the economy: ZERORest of the economy: ZERO

U. S. negative in telecom, U. S. negative in telecom, backwardness of mobile phonesbackwardness of mobile phones

5454

U. S. Retail MiracleU. S. Retail Miracle

Not uniform, concentrated in “large Not uniform, concentrated in “large stores charging low prices with self-stores charging low prices with self-service format”service format”

ALLALL of productivity gains post-1990 of productivity gains post-1990 attributable to attributable to NEWNEW establishments establishments and closing of old establishmentsand closing of old establishments

Average pre-1990 establishment had Average pre-1990 establishment had zero zero productivity growthproductivity growth

5555

Europe in RetailingEurope in Retailing

Not uniform – Carrefour, IkeaNot uniform – Carrefour, Ikea U. S. “Big Boxes” (Wal-Mart, Home Depot, U. S. “Big Boxes” (Wal-Mart, Home Depot,

Best Buy, Target)Best Buy, Target) Europe: Europe:

– Land-use regulation, planning approvalLand-use regulation, planning approval– Shop-closing restrictions on hoursShop-closing restrictions on hours– Central-city congestion, protection of central-Central-city congestion, protection of central-

city shopping precinctscity shopping precincts– Prohibition on discounting by large new storesProhibition on discounting by large new stores– Related to Phelps’ corporatismRelated to Phelps’ corporatism

5656

Not enough emphasis on new Not enough emphasis on new vs. oldvs. old

It’s not just that land-use planning It’s not just that land-use planning prevents Wal-mart from setting up a prevents Wal-mart from setting up a new big box on every highway new big box on every highway interchange in Europeinterchange in Europe

It’s that the MIX of retailing in Europe It’s that the MIX of retailing in Europe is heavily composed of small, old-is heavily composed of small, old-fashioned firmsfashioned firms– Walking down the street in Paris, all Walking down the street in Paris, all

those “green crosses”those “green crosses”

5757

Qualification: Qualification: Measurement IssuesMeasurement Issues

U. S. Lead in ICT Production U. S. Lead in ICT Production Exaggerated because part of Europe Exaggerated because part of Europe (Germany) doesn’t use hedonic price (Germany) doesn’t use hedonic price indexes for computersindexes for computers

Big measurement issues in wholesale Big measurement issues in wholesale and retail tradeand retail trade– Crediting trade for price declines in Crediting trade for price declines in

electronic goodselectronic goods– Failure to perform double deflationFailure to perform double deflation

5858

A New PaperA New Paper Marcel Timmer and Robert Inklaar, Marcel Timmer and Robert Inklaar,

Groningen GD-76, April 2005Groningen GD-76, April 2005 Results for MFPResults for MFP EU (4) USEU (4) USWholesale NIPA 1.3 2.7Wholesale NIPA 1.3 2.7Wholesale new 0.8 0.9Wholesale new 0.8 0.9Retail NIPA 1.4 4.6Retail NIPA 1.4 4.6Retail New 1.6 4.2Retail New 1.6 4.2Total Trade NIPA 1.3 3.6Total Trade NIPA 1.3 3.6Total Trade New 1.1 2.5Total Trade New 1.1 2.5

5959

Education and Education and University ResearchUniversity Research

U. S. leadership in secondary education, U. S. leadership in secondary education, 1910-401910-40

U. S. leadership in college education, post U. S. leadership in college education, post WWIIWWII

U. S. research universities America’s leading U. S. research universities America’s leading export industry even in dismal 1972-95, still export industry even in dismal 1972-95, still the envy of the worldthe envy of the world– Competition between state and privateCompetition between state and private– U. S. peer reviewed grants to young professors, not U. S. peer reviewed grants to young professors, not

young studentsyoung students– Contrast with Europe tuition subsidiesContrast with Europe tuition subsidies

6060

Let’s not Forget:Let’s not Forget:Germany is being Strangled by Germany is being Strangled by

EuroEuro No more monetary policyNo more monetary policy If inflation soars in Portugal or Ireland, If inflation soars in Portugal or Ireland,

German workers are unemployedGerman workers are unemployed Fiscal policy is strangled by the 3% deficit Fiscal policy is strangled by the 3% deficit

rulerule Germany is MUCH MORE threatened by Germany is MUCH MORE threatened by

Poland and Czech than U. S. by MexicoPoland and Czech than U. S. by Mexico Ross Perot was right in the wrong placeRoss Perot was right in the wrong place Different immigration dynamicsDifferent immigration dynamics

6161

Conclusion (for now)Conclusion (for now)

Economic research has focused on Economic research has focused on particular European problemsparticular European problems– Land use vs. big boxesLand use vs. big boxes– Employment taxes and low hours per Employment taxes and low hours per

capitacapita Broader issuesBroader issues

– Low fertility rate vs. retirement agesLow fertility rate vs. retirement ages– Stark contrast: Czech/Poland vs. MexicoStark contrast: Czech/Poland vs. Mexico– Stark contrast: U. S. can absorb Stark contrast: U. S. can absorb

immigrants and Europe cannotimmigrants and Europe cannot