[A-List] European productivity miracle, coming soon!

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Well, well, it's my old buddy Brad, who is anticipating Europe's
emulation of the US productivity miracle that apparently happened in the
US during the 1990s. Since it is probably the one ideologically
redeeming feature of the Clinton era, given the assault on "greed" and
other vices that suddenly emanates from the shameless Greenspan, among
other former boosterists, we can expect the "left" neoliberals of the
Clinton/New Democrat stripe to focus on this as the great success story
that will ensure that the US will rise like a phoenix from the ashes,
along with their reputations. And, hey, the good news is that we in
Europe can get on board too! Apparently the economy of Finland is being
transformed by the computer and communications revolution! It's not
quite Will Hutton's argument, which is that there is already a
productivity miracle in progress and it just hasn't been reported, but
it's a signal of the sort of strategy being adopted by the Clintonian
neoliberals in Washington and elsewhere: Europe is a strategic partner
as opposed to a strategic rival, to coin a phrase. I could supply a few
thoughts on Finland's supposed revolution -- see, for example the
earlier post on Nokia's remuneration scheme for a flavour of the
productivity miracle as it is emerging here. More on that subject to
follow later...


Boom-time in Europe
By Bradford DeLong
Financial Times: July 24 2002 

The second half of the 1990s saw an astonishingly large productivity
boom in America. Moreover, the boom did not end when the recession
began: the unemployment rate has risen by 2 percentage points over the
past six quarters, yet production has risen by 2.4 per cent.

But why was the boom in productivity so tightly confined to the US?
There is, after all, nothing in the air or water that makes
high-technology equipment work better in San Francisco or New York than
in Frankfurt, Lyons or Edinburgh.

In the past four years analysts have puzzled over slow relative growth
outside the US - particularly in Europe.

Some analysts from the Bundesbank suggested that it was the result of
different ways of calculating production in Europe but this would fail
fully to explain the component of the US productivity acceleration,
found not in computer-making but in computer-using industries.

The US Federal Reserve moved towards a consensus that the real problem
was too much European red tape: that businesses invest heavily in
high-tech equipment only when they can smell immediate productivity
gains from reorganisation and restructuring; and that western Europe's
steps towards economic reform and liberalisation have so far been too
small for businesses to be confident that they will be allowed to re-
organise and restructure.

Keynesians offered an opposed diagnosis: that businesses invest heavily
in high-tech equipment only when they need to satisfy increased demand;
and European central bankers unwilling (as Alan Greenspan, chairman of
the Fed, was in the 1990s) to take risks on the inflation side in order
to expand employment have slowed the transformation.

Still others said the boom was oversold - that because of the Nasdaq
bubble the US had pushed employment too high and invested too much in
telecommunications infrastructure and computer equipment that would
never be very useful. According to this thesis, the US boom was only a
boom in production, not an increase in economic welfare.

It would be unlikely if any of these stories were completely false: some
socially unproductive investments were made during the Nasdaq bubble;
some European companies have held back on investment plans because of
slack demand; others have held back on investment plans because of
various obstacles to economic flexibility; and there are important
differences between US and many European statistical systems in their
ability to track economic growth.

Yet I cannot help but be reminded of America just a decade ago, when
commentators and analysts speculated that all the investment in
high-tech equipment was wasteful and dissipative. People in Washington,
DC, observed the ferment of innovation in Silicon Valley but dismissed
the possibility that it would have a big macroeconomic impact. After
all, steadily and rapidly increasing computer power had already been at
work for three decades without having any effect on aggregate
productivity.

What the conventional wisdom of a decade ago in the US missed was that
you do not expect growing sectors - even rapidly growing ones - to have
an impact on aggregate statistics until they achieve critical mass. This
is an old lesson, first taught by the observation that historians of
technology think Britain's industrial revolution took place between 1780
and 1830 (when its key inventions were made) while social historians
think it took place between 1830 and 1870 (when the new industries of
steam, iron and mass production achieved critical mass and turned
Britain from a nation of shopkeepers into one of factory workers and
industrialists).

Indeed, a decade ago Daniel Sichel of the Federal Reserve pointed out
that it should have been no surprise that back then the aggregate impact
of the computer revolution was small: it was, after all, proportional to
how fast computer prices were declining, multiplied by the share of
national income spent on high technology, multiplied by the share of
total production attributable to the use of high tech. None of these
numbers was very big (although they were growing rapidly) and the
product of three not very big numbers will be a small number.

However, as computers and communications equipment continued to spread
throughout the economy, expenditure on high tech and the share of income
attributable to it continued to grow and did achieve critical mass. The
result was the productivity boom that is still continuing.

Much of western Europe is in the same situation as the US in the early
1990s, simply waiting for the next turn of the business cycle and the
continued diffusion of technology to achieve the necessary critical
mass. The computer and communications revolution is already transforming
the economies of Finland, Sweden, Ireland, Australia. My money is on
western Europe's revolution being relatively close behind.