Has the “New Economy” Rendered the Productivity Slowdown Obsolete?

Abstract

When the period since 1995:4 is compared to 1950-72 and 1972-95, growth in output per hour in the most recent (third) period has recovered more than two-thirds of the productivity growth slowdown registered between the first and second periods. This paper shows that all of this productivity rebound can be explained by three factors, (1) improved methods for measuring price deflators, (2) the normal procyclical response of productivity in periods like 1997-99 when output grows faster than trend, and (3) 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 percent of the economy located outside the sector which manufactures computer hardware, beyond that which can be explained by price remeasurement and by a normal (and modest) procyclical response. Indeed, 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 197295, and no acceleration at all in nondurable manufacturing. However, taking account of the productivity explosion in computers, the paper arrives at relatively optimistic estimates of growth in potential GDP and benign implications for the misnamed Social Security crisis. ___________________________ *This research has been supported by the National Science Foundation. I am grateful to Stuart Gurrea for his help with the data and charts. This paper was presented at the CBO Panel of Economic Advisors on June 2, 1999, and I am grateful for many suggestions and comments made there, particularly those of William D. Nordhaus. The paper was also presented at the meeting of economic advisers at the Federal Reserve Bank of Chicago on June 9, 1999. I am grateful to Christian Ehemann of the BEA for providing the data on computer output and for helpful discussions on the role of computers in the national accounts, and to Aaron Catlin of the BEA for clarifying the role of the CPI and PPI in the deflation of the medical care component of personal consumption expenditures. 1. Business Week editorial, May 31, 1999, p. 190. 2. Productive Confusion, Chase Securities U. S. Economic and Policy Research, U. S. Outlook Update, May 20, 1999, p. 4. 3. Another miracle: productivity, Economist, May 15, 1999, p. 30. 4. Speech given by Alan Greenspan at the Federal Reserve Bank of Chicago, May 6, 1999.

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