Arnold Kling  

The CEA on Productivity

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From the 2007 Economic Report of the President:

the surge in productivity in the late 1990s appears to be a story of growth in industries making and using IT capital...efficiency growth since 2000 has been particularly strong in the high-tech sector, but that it has also been strong in the distribution sector, which includes retail and wholesale trade, transportation, and warehousing. Finance and business services also showed strong efficiency growth and hence strong productivity growth. Manufacturing, which has made small investments in IT capital compared to the other sectors shown, has had the slowest recent growth in efficiency.

UPDATE: commenter Nathan Smith asks,

Question: If computers are the reason for productivity growth, why didn't the productivity surge occur in Europe and Japan? Those places use a lot of computers, too.

This is an excellent question. The Brad DeLong answer is that he expects Europe to catch up soon. The McKinsey Global Institute answer is that the U.S. allows much more vigorous competition in the retail sector, and until other countries reduce their protection of incumbent businesses, their productivity will continue to lag.

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Nathan Smith writes:

Question: If computers are the reason for productivity growth, why didn't the productivity surge occur in Europe and Japan? Those places use a lot of computers, too.

Patrick writes:

Because it is not enough to buy computers and plug them in. They needed to restructure their businesses (i.e. substitute computers for people where possible, then fire the people or reemploy them at un-automatable tasks). In the U.S., the political hostility towards creative destruction is low enough that the transformation could occur. European businesses couldn't exploit the efficiency gains because they're not allowed to fire anybody.

Japan is an interesting case. They want to have a huge welfare state without admitting they have a huge welfare state, so they've enacted a morass of regulations which prop up small, inefficient retail shops and wholesale distributors. Whereas the Swedes tax themselves to death to fund "job-training" programs for the unemployable, the Japanese pay very high retail prices to keep huge numbers of people "employed" in retail and wholesale firms which couldn't survive in a competitive market.

David writes:

Just computers is not the full reason for the production and developement growth. Its like Patrick points out, a company or business has to do more than just buy the computers and plug them in, they dont work for themselves, while they are widely efficient and necessary to many business transactions. Europe and China will eventually catch up in order to stay in a competitive state with America and other countries in hot persuit. Yet, having said this, you must employee the best people in the field to cover the companies use of the computers and the production that is achieved with them. This costs money believe it or not, and in doing that, it makes for complications with employment and other things dealing directly or jointly with production and development.

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