Robert J. GordonRobert J. GordonNorthwestern University and NBERNorthwestern University and NBER

Productivity Panel, Productivity Panel, Productivity Program Meetings,Productivity Program Meetings,

Cambridge, March 9, 2007Cambridge, March 9, 2007

Was the Post-1995 Was the Post-1995 Productivity Growth Productivity Growth

Upsurge Upsurge a Will-o’-the Wisp?a Will-o’-the Wisp?

Today’s OutlineToday’s Outline

Analysis of Quarterly Productivity Dynamics Analysis of Quarterly Productivity Dynamics in Context of 2001-04 “Explosion”in Context of 2001-04 “Explosion”

The Role of ICT Investment in the US The Role of ICT Investment in the US Productivity Growth RevivalProductivity Growth Revival– Big Role 1995-2000Big Role 1995-2000– Negative Role 2000-05Negative Role 2000-05

Alternative Explanations of ExplosionAlternative Explanations of Explosion Implications for Future of Productivity GrowthImplications for Future of Productivity Growth Where is Technology Going and Will it Where is Technology Going and Will it

Continue to Support Rapid Productivity Continue to Support Rapid Productivity Growth?Growth?

This Week’s Revisions: This Week’s Revisions: Last 8 Quarters from Old Last 8 Quarters from Old

(2.28) to New (1.76)(2.28) to New (1.76)

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006

Revised LP

Original LP

Decomposition of Decomposition of RevisionRevision

Four Quarter ChangeFour Quarter Change– Ending 2005:Q4 Old 2.51, new 2.11Ending 2005:Q4 Old 2.51, new 2.11– Ending 2006:Q4 Old 2.05, new 1.42Ending 2006:Q4 Old 2.05, new 1.42

Combined, AAGR over eight quarters Combined, AAGR over eight quarters ending 2006:Q4ending 2006:Q4– Old 2.28, New 1.76Old 2.28, New 1.76

Over ten quarters ending 2006:Q4Over ten quarters ending 2006:Q4– Old 1.89, New 1.48Old 1.89, New 1.48

AAGR last 10 quarters equal “dismal” AAGR last 10 quarters equal “dismal” 1972-951972-95

Topic #1: Behavior of Topic #1: Behavior of Productivity Growth in Productivity Growth in

Quarterly DataQuarterly Data Important to understand the Important to understand the

dynamicsdynamics They have nothing to do with the They have nothing to do with the

NBER business cycle chronologyNBER business cycle chronology The behavior of productivity is driven The behavior of productivity is driven

by the lag of hours behind outputby the lag of hours behind output This was a topic of the early 1960s, This was a topic of the early 1960s,

Okun’s Law and Walter Oi on labor as Okun’s Law and Walter Oi on labor as a “quasi-fixed factor”a “quasi-fixed factor”

8-quarter Change in 8-quarter Change in NFPB Output and Hours, NFPB Output and Hours,

1955-20061955-2006

-4

-2

0

2

4

6

8

10

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Output NFPB

Hours NFPB

Key Implications of Key Implications of LagLag

in Hours Behind in Hours Behind OutputOutput Productivity Growth is not Productivity Growth is not

Synchronized with the utilization of Synchronized with the utilization of resourcesresources

Because hours lags, productivity Because hours lags, productivity leadsleads

Productivity Growth is fastest at Productivity Growth is fastest at the beginning of the recoverythe beginning of the recovery

The “Early Recovery Productivity The “Early Recovery Productivity Bubble”Bubble”

Notice the Notice the “Early Recovery Bubble”,“Early Recovery Bubble”,8-qtr changes 1955-2006 8-qtr changes 1955-2006

-4

-2

0

2

4

6

8

10

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Output NFPB

Output per Hour NFPB

Methods for ExtractingMethods for Extractingthe Underlying Trendthe Underlying Trend

First method, Hodrick-Prescott Filter, First method, Hodrick-Prescott Filter, using a “smoother” parameter of 6400 using a “smoother” parameter of 6400 instead of the usual 1600instead of the usual 1600– Problem: Still too sensitive to the cycleProblem: Still too sensitive to the cycle

Second method: Kalman filter with Second method: Kalman filter with feedback from four lagged changes in feedback from four lagged changes in GDP gapGDP gap

Second method is better but I use an Second method is better but I use an average of both to display sensitivityaverage of both to display sensitivity

Deciphering theDeciphering theLong-run TrendLong-run Trend

Summary of Growth Rates that You’ll Summary of Growth Rates that You’ll See on Next Chart for the LP TrendSee on Next Chart for the LP Trend– 1955:Q1-1972:Q2 1955:Q1-1972:Q2 2.56 2.56 – 1972:Q2-1995:Q4 1972:Q2-1995:Q4 1.591.59– 1995:Q4-2000:Q4 1995:Q4-2000:Q4 2.342.34– 2000:Q4-2004:Q2 2000:Q4-2004:Q2 2.792.79– 2004:Q2-2006:Q42004:Q2-2006:Q4 2.362.36

Max value 2.90 (01:Q4) Max value 2.90 (01:Q4) Final value 2.23 (06:Q4) Final value 2.23 (06:Q4)

8-quarter Actual LP 8-quarter Actual LP GrowthGrowth

vs. the Average Trend vs. the Average Trend

-2

-1

0

1

2

3

4

5

6

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Comparing the two Comparing the two Methods: Methods:

Harmony since 1995Harmony since 1995

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

HP Trend

Average trend

Kalman with ouput variable trend

Percent

The Early Recovery The Early Recovery Bubble,Bubble,

How Much “Payback” is How Much “Payback” is Left?Left? 2000:Q4-2004:Q2, 14 quarter AAGR2000:Q4-2004:Q2, 14 quarter AAGR

– Actual 3.51Actual 3.51– Trend 2.79Trend 2.79– Difference 0.72, or cumulatively 2.52Difference 0.72, or cumulatively 2.52

2004:2-2006:4, 10 quarter average2004:2-2006:4, 10 quarter average– Actual 1.48Actual 1.48– Trend 2.36Trend 2.36– Difference -0.88, or cumulatively 2.20Difference -0.88, or cumulatively 2.20

We’ve paid back 2.20/2.52 or 87% of the We’ve paid back 2.20/2.52 or 87% of the explosion above trendexplosion above trend

Terminal trend (2006:Q4) is 2.23; average Terminal trend (2006:Q4) is 2.23; average growth 2007-08 of 2.07 is consistent with growth 2007-08 of 2.07 is consistent with that trendthat trend

From Dynamics to From Dynamics to Substance: Sources of Substance: Sources of

the Post-1995 Revival to the Post-1995 Revival to 20002000

Close Agreement in Research Using Close Agreement in Research Using Growth Accounting MethodologyGrowth Accounting Methodology

75-80 percent of post-1995 revival 75-80 percent of post-1995 revival was due to ICT investmentwas due to ICT investment– Direct Productivity Impact of ICT Direct Productivity Impact of ICT

ProductionProduction– Effect of “Capital Deepening,” more Effect of “Capital Deepening,” more

ICT capital per worker across the ICT capital per worker across the economyeconomy

What are The CurrentWhat are The CurrentDecompositions of IT Decompositions of IT Role?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 Something is fishy here – how could there be any fundamental connection between ICT any fundamental connection between ICT investment and productivity growth?investment and productivity growth?– Was there a one-shot character to the ICT boom of Was there a one-shot character to the ICT boom of

the late 1990s?the late 1990s?– What caused the post-2000 upsurge of labor What caused the post-2000 upsurge of labor

productivity in the wake of a collapse in ICT productivity in the wake of a collapse in ICT investment?investment?

What Was Unique about What Was Unique about 1995-2000: Computer 1995-2000: 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 ICT investment in GDP The chart for the share of ICT 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 What caused the 2000-04 acceleration and is that

period even period even relevantrelevant for future projections? for future projections?

BEA Deflators for BEA Deflators for Computer Hardware and Computer Hardware and ICT Equip & Software, ICT Equip & Software, 1965-20061965-2006

-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 Nominal Share of ICT Investment in GDP, 1965-Investment in GDP, 1965-

20062006

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

My 2003 BPEA Paper My 2003 BPEA Paper Proposed Three Proposed Three

Explanations for 2001-03Explanations for 2001-03 First Explanation: Cyclical DynamicsFirst Explanation: Cyclical Dynamics

– Productivity Always Grows Fastest in the Early Part of the Productivity Always Grows Fastest in the Early Part of the ExpansionExpansion

– ““Early Recovery Productivity Bubble”Early Recovery Productivity Bubble” Second Explanation: Savage Corporate Cost Second Explanation: Savage Corporate Cost

Cutting, Elements Unique to 2001-03 (compare to Cutting, Elements Unique to 2001-03 (compare to 1991-93), many citations to Nordhaus1991-93), many citations to Nordhaus– Post-2000 Collapse of stock market and profitsPost-2000 Collapse 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-Sharp divergence NIPA profits from S&P Profits 1997-

20002000– 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 O-S and J-H-S Growth Accounting Requires that

Full Productivity Payoff from Computers Occurs Full Productivity Payoff from Computers Occurs the Instant they Are Produced, Much Less the Instant they Are Produced, Much Less InstalledInstalled

Basu Basu et. Al. et. Al. and Yang-Brynjolfsson have and Yang-Brynjolfsson have emphasized complementary, unmeasured, and emphasized complementary, unmeasured, and delayed investments in intangible capitaldelayed investments in intangible capital

Makes sense that a big invention, the late 90s Makes sense that a big invention, the late 90s marriage of computers and communication, marriage of computers and communication, would take time to have its full prody impactwould take 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, Immelt of GE and Chambers of Cisco, “learning curve 3,

5, even 7 years”5, even 7 years”

My Conclusions About My Conclusions About the the Relevance of 1995-2000 Relevance of 1995-2000 and 2000-04and 2000-04 The ICT boom of 1995-2000 was a unique The ICT boom of 1995-2000 was a unique

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

The full productivity payoff of the ICT The full productivity payoff of the ICT investment bubble plausibly had a lag of three investment bubble plausibly had a lag of three years or more, same timing as cost cuttingyears or more, same 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 growth in 2001-03 were flip sides of the two big explanations, cost-cutting and intangible big explanations, cost-cutting and intangible delaydelay

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

Where Then Does that Where Then Does that Leave Us?Leave Us? We can’t base future projections on We can’t base future projections on

simple averages that are dominated simple averages that are dominated by 1995-2004by 1995-2004

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

Cyclical “Payback” is almost complete. Cyclical “Payback” is almost complete. Any further actual numbers < 2.1 will Any further actual numbers < 2.1 will pull down the trend furtherpull down the trend further

My current trend of 2.23 is below J-H-S My current trend of 2.23 is below J-H-S projection out ten years from nowprojection out ten years from now

To Project Potential GDP,To Project Potential GDP,Need Total Economy Need Total Economy

ProductivityProductivity

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

NFPB LP

Total economy LP

Difference

Implications for Potential Implications for Potential GDP GrowthGDP Growth

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 2.0 percent over 10 years, maybe less over Gordon 2.0 percent over 10 years, maybe less over

2525 Potential GDP GrowthPotential GDP Growth

– J-H-S hours growth projection is about the same as J-H-S hours growth projection is about the same as mine, 0.8.mine, 0.8.

– Total economy productivity = NFPB – 0.3Total economy productivity = NFPB – 0.3 2.0 – 0.3 = 1.72.0 – 0.3 = 1.7

– Potential GDP growth = productivity + hours Potential GDP growth = productivity + hours growthgrowth

1.7 + 0.8 = 2.51.7 + 0.8 = 2.5

The Optimists Stake The Optimists Stake TheirTheir

Hope in “Moore’s Law”Hope in “Moore’s Law” Clearly Moore’s Law accelerated in the Clearly Moore’s Law accelerated in the

late 1990s but has since deceleratedlate 1990s but has since decelerated Even if Moore’s Law continues at its Even if Moore’s Law continues at its

previous pace, who needs all that speed?previous pace, who needs all that speed? There’s nothing I need to do that I can’t There’s nothing I need to do that I can’t

do on my 3-yr-old laptop, except read the do on my 3-yr-old laptop, except read the keys!keys!

I can’t buy a new computer because I can’t buy a new computer because much of my software would have to be much of my software would have to be reinstalled (by whom?) to work with Vistareinstalled (by whom?) to work with Vista

A Classic Case of A Classic Case of Diminishing ReturnsDiminishing Returns

My PC that produced this set of My PC that produced this set of slides has at least 100 times the slides has at least 100 times the power as my first 1983 PCpower as my first 1983 PC

But there is a fixed factor, my But there is a fixed factor, my brain and my ten fingers.brain and my ten fingers.

Since Windows 95 and Since Windows 95 and Office 97, What has Office 97, What has

Changed?Changed? Virtually nothing has changed except Virtually nothing has changed except

fine-tuningfine-tuning The “Great Invention” of 1995-2000 The “Great Invention” of 1995-2000

was the was the marriagemarriage of the PC with of the PC with communicationscommunications

Erik’s “intangible capital” hypothesis Erik’s “intangible capital” hypothesis argues that it took a long time for argues that it took a long time for people to figure out how to make the people to figure out how to make the hardware usefulhardware useful

For Me the Benefits of For Me the Benefits of the PC and Internet were the PC and Internet were

Huge,Huge,but They’re Largely Overbut They’re Largely Over

E-mail since 1993, what’s new?E-mail since 1993, what’s new?– More e-mail from students, less from More e-mail from students, less from

friendsfriends Never see Research AssistantsNever see Research Assistants

– All research and co-authorship is All research and co-authorship is done via e-mail attachmentsdone via e-mail attachments

Nothing New since 1999Nothing New since 1999

Since 2000, Distinguish Since 2000, Distinguish Productivity from Productivity from

Consumer BenefitsConsumer Benefits Games, iPods, downloading videos, Games, iPods, downloading videos,

etc., may be great for consumers etc., may be great for consumers but it doesn’t raise productivitybut it doesn’t raise productivity– Possible source of “new product” bias Possible source of “new product” bias

in CPIin CPI Consumer broadband indirectly Consumer broadband indirectly

raises business productivity by raises business productivity by raising the demand for Amazon-type raising the demand for Amazon-type softwaresoftware

ICT is not the First ICT is not the First Industry to EncounterIndustry to EncounterDiminishing ReturnsDiminishing Returns

Commercial aircraft will always need two pilotsCommercial aircraft will always need two pilots Trucks will always need one driverTrucks will always need one driver Many services still require in-person contact: Many services still require in-person contact:

doctors, nurses, dentists, lawyers, professors, doctors, nurses, dentists, lawyers, professors, management consultants, bartenders, wait management consultants, bartenders, wait staff, barbers, beauticians staff, barbers, beauticians

Others need contact between an object and a Others need contact between an object and a person: grocery cashiers, valet parkers, auto person: grocery cashiers, valet parkers, auto repair, lawn maintenance, restaurant chefs, and repair, lawn maintenance, restaurant chefs, and every kind of maintenance from home roofers to every kind of maintenance from home roofers to Delta Airlines mechanics repairing engines.Delta Airlines mechanics repairing engines.

As Diminishing As Diminishing ReturnsReturns

Set in, The Hurdle Set in, The Hurdle RisesRises This is Jack Triplett’s point from the This is Jack Triplett’s point from the

Chicago AEA meetings of 1998Chicago AEA meetings of 1998 To Growth the Stock of Inventions at a To Growth the Stock of Inventions at a

rate of 10% per year:rate of 10% per year:– With 100 existing inventions, we need 10 With 100 existing inventions, we need 10

new ones per yearnew ones per year– With 110, we need 11With 110, we need 11– With 120, we need 12With 120, we need 12– And with 200, we need 20 new ones per And with 200, we need 20 new ones per

yearyear Continuous Increase in the “Hurdle”Continuous Increase in the “Hurdle”

What are the Next What are the Next GreatGreat

Inventions, You Tell Inventions, You Tell MeMe There’s the great telecom convergenceThere’s the great telecom convergence

– Cable, phone, broadband all provided by Cable, phone, broadband all provided by one company, consumer convenienceone company, consumer convenience

– Surely soon there will be no need for wires Surely soon there will be no need for wires inside the house, just a big wireless router inside the house, just a big wireless router next to the electric meternext to the electric meter

– Indeed electric and gas meters will be read Indeed electric and gas meters will be read automaticallyautomatically

But this is all small and incrementalBut this is all small and incremental

Questions for PanelistsQuestions for Panelistsand Audienceand Audience

Explain why Diminishing Returns Explain why Diminishing Returns does not Applydoes not Apply

Explain why the Hurdle is not Explain why the Hurdle is not rising, from 10 to 11 to 12 rising, from 10 to 11 to 12 inventionsinventions

Think up a reason to be optimistic Think up a reason to be optimistic about future productivity growthabout future productivity growth