[A-List] How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantage

[Charles Brown]

The New York Times
June 21, 2007
Economic Scene

How the U.S. Has Kept the Productivity Playing Field Tilted to Its Advantage
By AUSTAN GOOLSBEE

Americans' anxiety level over competitiveness with other nations has
grown in recent years. A large number of Americans appear to believe
that the United States will not be able to succeed in an open world
market, and they argue in favor of reducing our exposure to the
outside.

Paradoxically, when many of the people in these same competitor
nations look at our economy, they are rather anxious about us.

And the latest evidence coming out of the Center for Economic
Performance at the London School of Economics suggests that they may
be the ones with the right idea.

For all the collective hand-wringing, the United States is still home
to the most productive workers of all the major economies - more than
Japan, more than China, more than Germany, Britain, France or most any
other nation on earth.

Granted it started from the pole position, but the United States still
kept the lead in what some economists have come to call the
productivity miracle [!!] of the 1990s.

Normally, because it is easier to copy someone else's innovation than
to generate new ideas, as countries get richer and more productive,
their growth rates slow. Other countries may have much faster growth
than the United States, but once their income gets close to ours,
their growth slows substantially. This is the law [sic] of
convergence.

The data has mostly backed up the notion of convergence among rich
countries for decades. The United States miracle of the 1990s was that
our productivity began growing faster than that of other countries,
even though we were the richest to start with.

The popular explanation, of course, pointed to information technology
and, specifically, to the fact that the price of semiconductors began
falling at an even more rapid rate than they had been, starting in the
1990s.

Rather than a traditional drop of 20 percent a year, computer prices
began falling more like 30 percent a year. This may sound subtle, but
it couldn't be more dramatic. After 10 years of such declines, the 20
percent rate would have left computer prices almost four times higher
than the 30 percent rate did. Low computer prices drove mass adoption
of technology and, hence, the productivity miracle was born. Or so the
story goes.

The only problem is, the explanation doesn't work, according to John
Van Reenen at the London School of Economics. Professor Van Reenen is
a leader of a new generation of economists studying the differences in
economic performance across countries and businesses.

He said that the prices of information technology fell in Europe, too.
And Europeans bought information technology. But they had no
productivity miracle.

To explain the experience in the United States, one would have to
believe that Americans have some better way of translating the new
technology into productivity than other countries. And that is
precisely what Professor Van Reenen's research suggests.

His paper "Americans Do I.T. Better: U.S. Multinationals and the
Productivity Miracle," (with Nick Bloom of Stanford University and
Raffaella Sadun of the London School of Economics) looked at the
experience of companies in Britain that were taken over by
multinational companies with headquarters in other countries. They
wanted to know if there was any evidence that the American genius with
information technology transfers to locations outside the United
States. If American companies turn computers into productivity better
than anyone else, can businesses in Britain do the same when they are
taken over by Americans?

And in the huge service sectors - financial services, retail trade,
wholesale trade - they found compelling evidence of exactly that.
American takeovers caused a tremendous productivity advantage over a
non-American alternative.

When Americans take over a business in Britain, the business becomes
significantly better at translating technology spending into
productivity than a comparable business taken over by someone else. It
is as if the invisible hand of the American marketplace were somehow
passing along a secret handshake to these firms.

Companies like Wal-Mart seem to be more adept at translating
technology into productivity than anyone else. The Asda supermarket
chain in Britain, for example was a middling fourth in its home market
before it was taken over by Wal-Mart in 1999. Asda proceeded to grow,
sharply, and has taken the No. 2 spot. [it had nothing to do with
Wal-Mart's labor policies?]

Throughout the service-based economy, American companies have proven
remarkably adept at adjusting to new conditions and incorporating
technology. Since these industries represent a large majority of our
economy, the news is rather good.

The real question is whether this advantage will last. In an
interview, Professor Van Reenen observed that there are two possible
outcomes. One is that the last 10 years were an aberration, a one-time
happenstance whereby the United States took advantage of the drop in
computer prices to pull away from the competition. Under this theory,
the United States will soon return to its normal long-term
productivity growth rate as the rest of the pack catches up and copies
what the American companies did - the same old convergence story.

But there is a chance that the 1990s represent a fundamental shift in
the global economy. Perhaps the greater amount of uncertainty and
churn in the world economy in the 1990s is the new norm. Perhaps the
21st century will continually favor those who adjust best to changes.
As Professor Van Reenen put it, "If the world has become one in which
everyone is trying to hit a moving target, it certainly helps to be
the best at changing one's aim."

But that is, of course, the paradox of the American position. We hate
experiencing major adjustments and industry transformations that force
people to look for new jobs. That experience has made many skeptical
about the future of the United States in the world economy. Yet the
evidence seems to show that for all our dissatisfaction, we are the
most flexible economy around and may be best poised to take advantage
of the coming changes on a global scale precisely because we are so
good at adjusting.

Perhaps the lesson from the research can be boiled down to something
most Americans clearly understand: The world economy may be tough on
your industry but look on the bright side: you could be French.

[of course, Goolsbee consistently measures "success" using market and
capitalist standards, such as GDP. This ignores such things as
France's greater success at providing its people with leisure.]

Austan Goolsbee is a professor of economics at the University of
Chicago Graduate School of Business and a research fellow at the
American Bar Foundation. E-mail: goolsbee at xxxxxxxxxxxx