United States
Selected Issues
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International Monetary Fund
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Publication Date:
06 Sep 2000
eISBN:
9781451960297
Language:
English
Keywords:
ISCR; CR; employment growth; price-earnings ratio; earnings; TFP growth; computer price deflator; world IT goods production; TFP in the computer; increase in total factor productivity growth; Capital productivity
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This Selected Issues paper focuses on the adoption of new technology and globalization in the United States of America, and assesses the change in the productivity growth and revised estimates, the developments in the labor market, equity prices, and the technology boom. The paper analyzes how the monetary policy influences economic conditions in emergency markets; reviews the developments in financial consolidation; discusses the key provisions contained in the Gramm-Leach-Bliley (GLB) Act, the implications of the GLB Act for financial consolidation, and regulatory and supervisory practices.

Abstract

This Selected Issues paper focuses on the adoption of new technology and globalization in the United States of America, and assesses the change in the productivity growth and revised estimates, the developments in the labor market, equity prices, and the technology boom. The paper analyzes how the monetary policy influences economic conditions in emergency markets; reviews the developments in financial consolidation; discusses the key provisions contained in the Gramm-Leach-Bliley (GLB) Act, the implications of the GLB Act for financial consolidation, and regulatory and supervisory practices.

I. Does the Pickup in Productivity Growth Mean that there Is a “New Economy?” 1

1. Strong economic growth combined with low inflation and a pickup in labor productivity growth has led many observers of U.S. economic conditions to proclaim the existence of a “new economy” in the United States. In general terms, the adoption of new technology and globalization are seen as changing the underlying economic relationships in the economy so that continued strong growth and low inflation are possible.

2. From an international perspective, the production and use of information technologies (IT) are most pronounced in the United States.2 In 1997, the United States accounted for nearly one-third of world IT goods production, with Japan accounting for about a quarter, and the European Union accounting for about 20 percent.3 The IT sector in the United States accounts for a larger share of GDP than in most other industrial countries (Figure 1). The United States has also ranked first in IT spending as a share of GDP compared to other major industrial countries over the period 1992-97, although more recently Japan has begun to catch up (Figures 2 and 3).

Figure 1.
Figure 1.

International Comparison: IT Production, 1997

(As a percent of GDP)

Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A001

Source: OECD (2000), and World Economic Outlook database
Figure 2.
Figure 2.

International Comparison: IT Expenditures

(As a percent of GDP)

Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A001

Source: OECD (2000).
Figure 3.
Figure 3.

International Comparison: IT Expenditures, 1997

(As a percent of GDP)

Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A001

Source: OECD (2000).

3. Given the United States’ lead role in producing and consuming information technologies, considerable attention has recently focused on identifying whether a link can be established between IT and sustained productivity growth in the United States, and whether the U.S. experience offers lessons for other industrial countries as their IT sectors develop further. Although recent U.S. empirical evidence establishes a link between IT and the pickup in labor productivity growth in the second half of the 1990s, it remains premature to conclude that a “new economy” exists.

A. What is the “New Economy?”

4. Despite the amount of attention that the term “new economy” has received, there is little consensus on what is now different about the U.S. economy and whether such a difference has fundamentally changed the way in which the economy works. The range of interpretations on what constitutes the “new economy” can be organized into three different but related categories:4

  • The long-run growth view. In this interpretation of the “new economy,” higher long-term growth is achieved owing to a permanently higher growth rate in productivity that stems primarily from the adoption of and continued innovation in IT, as well as from the effects of globalization and deregulation. Empirical evidence suggests that there is a link between using and producing computers and the pickup in labor productivity in the second half of the 1990s.5 However, based on available data, it is not possible to conclude as of yet whether or not the shift to higher productivity growth is sustainable. The substantial increase in productivity associated with IT experienced in recent years may simply represent a one-time transition to a higher level of productivity because of a major change in technology. This can be considered an “old economy” process, in the sense that it represents the traditional process of development, adoption, and diffusion of new technologies.

  • The positive feedback view. In this view, the “new economy” is characterized by a pickup in total factor productivity growth across many sectors based on the adoption of IT, which results in increasing returns to scale, other network economies, and positive spillover effects. In other words, investment in IT in one firm improves the productivity of other firms as they are able to work together more efficiently. Although there is anecdotal evidence, to date, there is little solid empirical evidence that such positive feedback effects across industries are more important and pervasive now than in the past.

  • The resource utilization view. This version of the “new economy” is based on the observation that during the recent expansion unemployment has declined below most estimates of NAIRU without spurring inflation, implying that NAIRU must have declined. It is argued that inflationary pressures in the United States have remained subdued because of globalization (domestic firms have faced increased competition from less-expensive imported goods) and IT, which has increased productivity and efficiency.6 Because actual productivity is increasing faster than what workers perceive, wage demands are muted, and it appears as though the NAIRU has declined.7 Accordingly, labor and other utilization rates can be higher without triggering inflationary pressures. At present, however, it is extremely difficult to disentangle whether the decline in NAIRU is permanent or simply related to temporary factors, such as the period of time it takes for workers to incorporate higher trend productivity into wage demands. In addition, positive supply shocks—for example, the past weakness in commodity prices, the strength of the U.S. dollar, and restrained health care costs—may have temporarily reduced inflationary pressures, but have not changed any of the underlying relationships in the economy.

B. U.S. Evidence on the Link Between IT and Productivity

5. Spending on information processing equipment and software has grown at a rapid pace (Table 1). In the second half of the 1990s, spending on computers and peripheral equipment surged to an average annual rate of about 46 percent. As a result, information-processing equipment and software as a share of GDP (in real terms) rose to about 5¾percent in 1999, from less that 1 percent in 1970. The contribution of IT capital to output growth increased to about 1.1 percentage points for the period 1996-99, from about 0.6 percentage point during 1991-95.8

Table 1.

United States: Information-Processing Equipment and Software 1/

(Average annual growth rates)

article image
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Real investment data are chain-linked 1996 dollars.

6. These strong rates of investment were in part driven by sharp declines in prices for computer equipment. In particular, over the period 1995-99, the prices for computers and equipment plunged by 24 percent, while prices in the overall economy—as measured by the GDP deflator—increased by 1.6 percent.9 The computer price deflator takes into account the improved qualities and performance of computers over time, and is therefore a measure of the ratio of price to performance.

7. The rapid adoption of IT has been widely credited as being the driving force behind the acceleration in labor productivity that took place during the 1990s (Table 2, Figure 4). Several recent studies conclude that both the production and use of IT have made a significant contribution to labor-productivity growth.10 While technological change has been integral to the acceleration in productivity growth, it is important to emphasize that this has occurred through the familiar “old economy” process, rather than “new economy” spillover effects. Greater efficiencies achieved in producing computers and semiconductors have boosted total factor productivity (TFP)—and hence labor productivity—in these sectors, as evidenced by the plunging prices of their products. These price declines encouraged other industries to raise their investment in IT assets, contributing to capital deepening and further boosting labor productivity. Together, the impact of producing and using IT accounts for an estimated 45 to 75 percent of the acceleration in labor productivity during the second half of the 1990s (Table 3). To sustain higher productivity growth, however, further technological change and the adoption of these newer technologies would be required.

Table 2.

United States: Growth in Labor Productivity, 1960-99 1/

(Percent, average annual rate)

article image
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Labor productivity is output per hour of all persons.

Table 3.

United States: Sources of the Acceleration in Labor-Productivity Growth, 1974-99 1/

article image
Sources: Council of Economic Advisers (2000); Gordon (2000b); Oliner and Sichel (2000); and Whelan (2000).

In percentage points.

Estimate based on results for the period 1995-98.

Structural acceleration in labor productivity which eliminates the increases associated with cyclical effects.

Includes contribution of price-measurement changes.

Figure 4.
Figure 4.

United States: Labor Productivity Growth

(Percent)

Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A001

Source: U.S. Department of Labor, Bureau of Labor Statistics

8. Computer and semiconductor production have played an important role in explaining the acceleration in labor-productivity growth. This effect is illustrated by the recent pickup in TFP growth for the economy as a whole which is estimated to have increased to about 1¼ percent during the period 1996-99, up from about 0.5 percent over the period 1991-95.11 Oliner and Sichel (2000), Jorgenson and Stiroh (2000), and other authors find that stronger TFP growth explains about 70 percent of the pickup in labor productivity growth in the second half of the 1990s. In particular, although the computer and semiconductor sectors account for only about 2¼ percent of the economy’s output, these sectors contributed about one-third of the stronger growth in TFP.

9. Capital deepening associated with the use of information technologies also has made an important contribution to the pickup in labor productivity growth. For example, Oliner and Sichel (2000) find that about 50 percent of the acceleration in labor productivity is attributable to investment in IT capital, whereas other capital made no contribution.12 Jorgenson and Stiroh (2000) also find that capital deepening has contributed to the acceleration in labor-productivity growth, although the increase in TFP growth contributed a larger share.13

10. To further understand TFP growth, Jorgenson and Stiroh (2000) extend their analysis by calculating industry contributions to aggregate TFP growth (Figure 5).14 The results reveal that over the period 1958-96, a broad range of industries contributed to an average annual rate of TFP growth of about 0.5 percent, with trade, industrial machinery, and electronic equipment making the largest contributions. Although the growth rate of TFP in the trade industry was about 1 percent per year, it makes the largest contribution because of the relative size of the industry. In contrast, despite their relatively small size, the industrial machinery and the electronic equipment sectors make large contributions because of increases in TFP in both industries of 1.5 and 2 percent, respectively. It is noteworthy that nine industries made a negative contribution to TFP growth, including services. TFP measures for services tend to be biased downward because output is difficult to measure.15 Typically, output is measured as the real value of the inputs used. While this may be an appropriate assumption in some sectors, in others where substantial innovation is occurring (for example, banking, medical care, and consulting services), productivity is clearly biased downward. Limitations in measuring output may potentially mask significant improvements in productivity.

Figure 5.
Figure 5.

United States: Industry Contribution to Aggregate TFP Growth, 1958-96

Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A001

Source: Jorgenson and Stiroh (2000)

11. As an alternative approach to understanding the pickup in labor-productivity growth, Gordon (1999, 2000b) focuses on separating trend from cyclical labor-productivity growth, and then determines the extent to which IT has affected trend-productivity growth (see Table 3). Gordon emphasizes that when real GDP grows at a faster rate than potential, as has been the case for the last four years, labor productivity tends to accelerate because firms’ existing labor forces are worked more intensively.16 He estimates that of the observed 1.4 percentage point acceleration in labor productivity growth over the period 1972-95 to 1995-99, 0.5 percentage point can be attributed to a cyclical increase, leaving a 0.8 percentage point increase in trend labor-productivity growth. Gordon finds that about half of the increase in trend labor productivity is accounted for by increases in labor quality and capital deepening and the remaining half is attributable to total factor productivity. Like other authors, Gordon finds that TFP in the computer and semiconductor manufacturing sector increased, but he finds no evidence that TFP increased elsewhere in the economy. Therefore, Gordon concludes that capital deepening has contributed to a pickup in labor-productivity growth even outside of the computer sector, but that there has not been an economy-wide trend increase in total factor productivity growth, which would be expected if significant “new economy” spillover effects were occurring in the economy.17 Gordon’s results, however, are likely to be quite sensitive to the underlying assumptions for potential output growth used in separating trend from cyclical productivity growth.

List of References

  • Blinder, A. S., 2000, “The Internet and the New Economy,” The Brookings Institution Policy Brief #60, June.

  • Corrado, C., and L. Slifman, 1999, “Decomposition of Productivity and Unit Costs,” AEA Papers and Proceedings, Vol. 89, No. 2, May.

  • Council of Economic Advisors, 2000, Economic Report of the President (Washington, D.C.: U.S. Government Printing Office).

  • Domar, E., 1961, “On the Measurement of Technological Change,” Economic Journal, Vol. 71, No. 284, December, pp. 709–29.

  • Gordon, R. J., 1999, “Has the “New Economy” Rendered the Productivity Slowdown Obsolete?,” Working Paper, Northwestern University, June.

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  • Gordon, R. J., 2000a, “Discussion of Dale W. Jorgenson and Kevin J. Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” Brookings Papers on Economic Activity, forthcoming.

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  • Gordon, R.J., 2000b, “Does the “New Economy” Measure up to the Great Inventions of the Past?” Journal of Economic Perspectives, forthcoming.

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  • Hall, Robert, 1999, “The Stock Market and Capital Accumulation,” NBER Working Paper No. 7180, June.

  • Jorgenson, D.W., and K.J. Stiroh, 2000, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” Brookings Papers on Economic Activity, forthcoming.

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  • Landefeld, J.S., and B.M. Fraumeni, 2000, “Measuring the New Economy,” U.S. Department of Commerce, Bureau of Economic Analysis, Advisory Committee Meeting, May 5.

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  • Meyer, L., 2000, “The New Economy Meets Demand,” Remarks before the Boston Economics Club, Boston, Massachusetts, June 6.

  • Moulton, B.R., R.P. Parker, and E.P. Seskin, 1999, “A Preview of the 1999 Comprehensive Revision of the National Income and Product Accounts, Definitional and Classification Changes, Survey of Current Business, August.

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  • OECD, 2000, Information Technology Outlook 2000 (Paris: OECD).

  • Oliner, S. D. Sichel, D. E. 2000, “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Board of Governors of the Federal Reserve Working Paper 2000-20.

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  • Prakken, J.L., 2000, “Potential Productivity and the Stock Market in the “New” U.S. Economy,” Business Economics, April.

  • Sichel, D., 2000, Comment on “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” by Dale W. Jorgenson and Kevin Stiroh, Brookings Papers on Economic Activity, forthcoming.

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  • Sichel, D., 1999 “Computers and Aggregate Economic Growth: An Update,” Business Economics, April, pp. 18–24.

  • Stiroh, K., 1999, “Is There a New Economy?,” Challenge, July-August.

  • Whelan, K., 2000, “Computers, Obsolescence, and Productivity,” Working Paper, Division of Research and Statistics, Board of Governors of the Federal Reserve, February.

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1

Prepared by Paula R. De Masi.

2

Although the precise definition of IT varies, it typically includes semiconductors, computer systems, electronic storage devices, printers, data communication equipment, software, and telecommunication equipment and services. For a detailed description, see OECD (2000).

3

Among the European Union countries, the United Kingdom accounted for 4.2 percent, Germany for 3.9 percent, France for 3.5 percent, and Italy 1.8 percent of worldwide production of IT goods.

4

For a more detailed discussion of the varying interpretations of the new economy, see Stiroh (1999) and Meyer (2000).

5

For a survey of recent evidence, see Oliner and Sichel (2000).

6

For example, because of better access to information, IT allows firms to improve inventory management, which reduces uncertainty and the cost of production. In addition, new capacity can be brought on line with shorter lead times owing to the ways in which IT has helped to streamline the design and delivery process.

7

For a more detailed discussion, see Blinder (2000), and Council of Economic Advisers (2000).

8

Oliner and Sichel (2000). Average annual output growth was 4.8 and 2.8 percent during the periods 1996-99 and 1991-95, respectively.

9

Over the period 1970-99, prices for computers and equipment declined at an average annual rate of 16 percent. The average annual decline in the price deflator for software is notably much smaller (see Table 1). It may well be the case that the official price indexes used to deflate software investment do not fully capture quality improvements. Moulton, Parker, and Seskin (1999) note that only price indexes for prepackaged software are based on hedonic methods which take account of quality improvements. In contrast, prices for business own-account software are based on input-cost indexes which assume no gains in productivity.

10

The distinction between the production and use of IT is based on the relationship that the growth in labor productivity is based on capital deepening, improvements in labor quality, and total factor productivity growth. For a detailed discussion, see Jorgenson and Stiroh (2000).

11

The TFP estimates are from Oliner and Sichel (2000). The official TFP data are published by the Bureau of Labor Statistics, but 1997 is the most recent year for which data are available.

12

IT capital is defined to include computer hardware and software, and communication equipment.

13

Oliner and Sichel (2000) explain that the difference in their results and those of Jorgenson and Stiroh’s relate to the latter’s: (i) use of a broader concept in defining output, which includes imputed service flows from owner-occupied housing and consumer durables, and (ii) assumption that capital becomes productive with a lag, rather than immediately, which decreases the estimated size of the capital stock.

14

The methodology employed by Jorgenson and Stiroh (2000) establishes a growth accounting equation for each industry, and then using “Domar weights”—that is, industry gross output divided by aggregate value added—links the industry TFP growth to aggregate TFP growth, so that aggregate TFP growth is expressed as a weighted average of industry TFP growth.

15

For a detailed discussion of productivity growth at a disaggregated level, see Corrado and Slifman (1999).

16

This suggests that the hours worked data used to measure labor input does not accurately reflect work effort over the business cycle.

17

Gordon (2000b) explains that the absence of a pickup in total factor productivity growth outside of the computer sector reflects the fact that in his view most computer applications suffer from the rapid onset of diminishing marginal returns, and use of the internet represents a substitution of one form of information gathering for another. In contrast, other inventions such as the electric light or the electric motor had a much greater impact on the standard of living.

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Cover IMF Staff Country Reports
United States: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2000: Issue 112
Publisher:
International Monetary Fund
ISBN:
9781451960297
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781451960297.002
  • Figure 1.
    View in gallery
    Figure 1.

    International Comparison: IT Production, 1997

    (As a percent of GDP)

  • Figure 2.
    View in gallery
    Figure 2.

    International Comparison: IT Expenditures

    (As a percent of GDP)

  • Figure 3.
    View in gallery
    Figure 3.

    International Comparison: IT Expenditures, 1997

    (As a percent of GDP)

  • Figure 4.
    View in gallery
    Figure 4.

    United States: Labor Productivity Growth

    (Percent)

  • Figure 5.
    View in gallery
    Figure 5.

    United States: Industry Contribution to Aggregate TFP Growth, 1958-96

Figure 1.

International Comparison: IT Production, 1997

(As a percent of GDP)
Figure 2.

International Comparison: IT Expenditures

(As a percent of GDP)
Figure 3.

International Comparison: IT Expenditures, 1997

(As a percent of GDP)
Figure 4.

United States: Labor Productivity Growth

(Percent)
Figure 5.

United States: Industry Contribution to Aggregate TFP Growth, 1958-96