Two Centuries of Economic Two Centuries of Economic Growth: Europe ChasingGrowth: Europe Chasing
the American Frontierthe American Frontier
Robert J. GordonRobert J. Gordon
Northwestern UniversityNorthwestern University
MIT Macro Seminar, April 26, 2005MIT Macro Seminar, April 26, 2005
22
Outline of the Two PapersOutline of the Two Papers Paper #1, “Why is Europe so Productive yet so Paper #1, “Why is Europe so Productive yet so
Poor?”Poor?”– Interpretation of falling Interpretation of falling relativerelative hours per capita in hours per capita in Europe vs. U. S.Europe vs. U. S.– Major hypothesis: only a Major hypothesis: only a small portionsmall portion of falling relative of falling relative
hours per capita represents welfare value of leisurehours per capita represents welfare value of leisure– Audacious claim that U. S. PPP GDP per capita overstates Audacious claim that U. S. PPP GDP per capita overstates
U. S. welfare advantageU. S. welfare advantage Like a fine wine, Paper #1 has been fermentingLike a fine wine, Paper #1 has been fermenting Seminar will have data, references, and Seminar will have data, references, and
interpretations that are go well beyond the interpretations that are go well beyond the written versionwritten version
33
Paper #2, Economic HistoryPaper #2, Economic HistoryRevisitedRevisited
Why did Europe fall Behind?Why did Europe fall Behind? Unique point of viewUnique point of view
– Divided by epoch: 1870-1913, 1913-50, Divided by epoch: 1870-1913, 1913-50, 1950+1950+
– Divided by reason: Pre-1913 the “USE” Divided by reason: Pre-1913 the “USE” DeviceDevice
– Post-1913: Exploiting the Great Post-1913: Exploiting the Great InventionsInventions
Rewriting the “Stanford Economic Rewriting the “Stanford Economic History”: Abramovitz, David, WrightHistory”: Abramovitz, David, Wright
44
Post-1995: Europe Stops Post-1995: Europe Stops Catching Up, Falls Behind Catching Up, Falls Behind
AgainAgain Comes at end of Paper #2, links both Comes at end of Paper #2, links both
paperspapers Since 1995, Europe has fallen back Since 1995, Europe has fallen back
on Productivity but started a tiny on Productivity but started a tiny recovery in Hours per Capitarecovery in Hours per Capita– Why the Role of IT was ExaggeratedWhy the Role of IT was Exaggerated– Has the Role of Retailing Been Has the Role of Retailing Been
Exaggerated?Exaggerated?– Enduring U. S. AdvantagesEnduring U. S. Advantages
55
Back to Part #1:Back to Part #1:What are the Substantive What are the Substantive
IssuesIssues ““Why is Europe so Productive yet so Why is Europe so Productive yet so
Poor?”Poor?” Superficial Answer: H/N has been Superficial Answer: H/N has been
fallingfalling Why?Why?
– Blanchard (Blanchard (JEP, JEP, p. 4): “The main difference p. 4): “The main difference is that Europe has used some of the is that Europe has used some of the increase in productivity to increase leisure increase in productivity to increase leisure rather than income, while the United States rather than income, while the United States has done the opposite.” has done the opposite.”
66
An Opposing ViewAn Opposing View
By definition the decline in Europe’s Y/N By definition the decline in Europe’s Y/N related to Y/H can be divided into:related to Y/H can be divided into:– Decline in relative H/E (35% 1960-95)Decline in relative H/E (35% 1960-95)– Decline in relative E/N (65% 1960-95)Decline in relative E/N (65% 1960-95)
Voluntary Leisure?Voluntary Leisure?– Some of decline in H/E is not voluntarySome of decline in H/E is not voluntary– Most of decline in E/N is not voluntaryMost of decline in E/N is not voluntary
New References for Welfare New References for Welfare InterpretationInterpretation– Freeman-Schettkat (2005) & Alesina (2005)Freeman-Schettkat (2005) & Alesina (2005)
77
Part #1: Part #1: What are the Data Issues?What are the Data Issues?
How to Compare Europe GDP vs. US GDPHow to Compare Europe GDP vs. US GDP Thanks to Peter Neary AER Dec 2004:Thanks to Peter Neary AER Dec 2004:
– Geary vs. EKS vs. “QUAIDS”Geary vs. EKS vs. “QUAIDS” Alternative methods of converting Ypc to Alternative methods of converting Ypc to
international PPPinternational PPP– Maddison and PWT use Geary-KhamisMaddison and PWT use Geary-Khamis– OECD and Eurostat use EKS (EltetOECD and Eurostat use EKS (Eltetö, Köves, and ö, Köves, and
Szulc), a multilateral extension of Fisher Szulc), a multilateral extension of Fisher “ideal”“ideal”
– Groningen web site gives bothGroningen web site gives both
88
An Operational ProcedureAn Operational Procedure
My calculations from Neary for EU-15 / US My calculations from Neary for EU-15 / US 19801980– Neary preferred QUAIDS = 74.3Neary preferred QUAIDS = 74.3– GK 71.4, EKS 77.5GK 71.4, EKS 77.5– Average Groningen GK and EKS = 74.4Average Groningen GK and EKS = 74.4
Hence all charts from here on use average Hence all charts from here on use average of GK & EKSof GK & EKS
This applies only to GDP, not to This applies only to GDP, not to population, hours, employment, labor population, hours, employment, labor forceforce
99
Other Data IssuesOther Data Issues
Hedonic Price Indexes: Data Hedonic Price Indexes: Data Noncomparable?Noncomparable?
Studies for Germany show difference Studies for Germany show difference in AAGR productivity of ~0.2in AAGR productivity of ~0.2
Some EU countries use hedonics for Some EU countries use hedonics for computers so overall EU difference computers so overall EU difference would be lesswould be less
More interesting: Overstatement of More interesting: Overstatement of U.S. GDP (energy, prisons, disperson)U.S. GDP (energy, prisons, disperson)
1010
A Preview of A Preview of ALL THESE ALL THESE SLIDESSLIDES
Slides of Europe vs. U. S., 1820-2004 for Slides of Europe vs. U. S., 1820-2004 for Y/N, 1870-2004 for Y/HY/N, 1870-2004 for Y/H
Maddison through 1950, ratio-linked to Maddison through 1950, ratio-linked to Groningen 1950+, average GK and EKSGroningen 1950+, average GK and EKS– Maddison piecewise loglinear trends. Years for Maddison piecewise loglinear trends. Years for
Y/N: 1820, 1870, 1913, 1923, 1929, 1941, Y/N: 1820, 1870, 1913, 1923, 1929, 1941, 19501950
– Y/H 1870, 1913, 1929, 1938, 1950Y/H 1870, 1913, 1929, 1938, 1950 Each slide, a wide angle back to the start, Each slide, a wide angle back to the start,
then a “close-up” 1960-2004then a “close-up” 1960-2004 Ratios, then Ratios of RatiosRatios, then Ratios of Ratios
1111
The Broad Sweep of 2 The Broad Sweep of 2 Centuries:Centuries:
Income per CapitaIncome per Capita
1000
10000
100000
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
1212
Since 1960: Europe Fails Since 1960: Europe Fails to Converge and then Falls to Converge and then Falls
BehindBehind
1000
6000
11000
16000
21000
26000
31000
36000
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
1313
Productivity since 1870:Productivity since 1870:Almost Catching Up is Not Almost Catching Up is Not
EnoughEnough
1
10
100
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
1414
Productivity Post-1960:Productivity Post-1960:The Ratio Reaches 96.9% in The Ratio Reaches 96.9% in
19951995
0
5
10
15
20
25
30
35
40
45
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
1515
The Europe / US Ratios The Europe / US Ratios Are Much More DramaticAre Much More Dramatic
0
20
40
60
80
100
120
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Output per hourOutput per capita
1616
The Ratios Again:The Ratios Again:A Post-1960 Close-upA Post-1960 Close-up
40
50
60
70
80
90
100
110
1960 1965 1970 1975 1980 1985 1990 1995 2000
Output per hour
Output per capita
1717
Ratios of Ratios:Ratios of Ratios:The Real Clue to What is Going The Real Clue to What is Going
OnOn
60
70
80
90
100
110
120
130
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Hours per employee
Employee to population ratio
Output per capita tooutput per hour ratio
1818
Ratios of Ratios: Ratios of Ratios: The Post-1960 Close-upThe Post-1960 Close-up
60
70
80
90
100
110
120
130
1960 1965 1970 1975 1980 1985 1990 1995 2000
Hours per employee
Employee to population ratio
Output per capita tooutput per hour ratio
1919
What are the NumbersWhat are the Numbersthat Go with these Lines?that Go with these Lines?
(Y/N) / (Y/H) H/E E/N
1960 119.8 102.4 115.9
1995 73.6 87.1 85.6
2004 77.1 85.4 91.7
% Log Change
1960-1995 -48.6 -16.1 -30.3
1960-2004 -44.1 -18.1 -23.4
2020
Hours per Employee Declined Hours per Employee Declined in Tandem until 1970, then in Tandem until 1970, then
divergeddiverged
0
500
1000
1500
2000
2500
3000
3500
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
2121
A Close-up of Hours per A Close-up of Hours per EmployeeEmployeeafter 1960after 1960
1400
1500
1600
1700
1800
1900
2000
2100
2200
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
2222
Employment per CapitaEmployment per Capitaback to 1870back to 1870
30%
35%
40%
45%
50%
55%
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
2323
Employment per Capita after Employment per Capita after 1960:1960:
U.S. Women and Teens U.S. Women and Teens Marched Off to Work 1965-Marched Off to Work 1965-
19901990
30%
35%
40%
45%
50%
55%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
2424
An Outline of Issues for An Outline of Issues for DiscussionDiscussion
Europe’s failure to converge is not just a Europe’s failure to converge is not just a matter of voluntary vacationsmatter of voluntary vacations
Much more of the change 1960-95 was the Much more of the change 1960-95 was the decline in employment per capitadecline in employment per capita
Even lower hours are not entirely Even lower hours are not entirely voluntaryvoluntary– ““If the French really wanted to work only 35 If the French really wanted to work only 35
hours, why do they need the hours police?”hours, why do they need the hours police?”– Alesina: Alesina:
Short hours are a victory for unions and Short hours are a victory for unions and parliamentary politics, not for free choiceparliamentary politics, not for free choice
So is early retirement, a major source of falling E/NSo is early retirement, a major source of falling E/N
2525
What Matters for Welfare is Y/NWhat Matters for Welfare is Y/N + Differential Leisure, not Y/H + Differential Leisure, not Y/H
Europeans have “bought” their high Europeans have “bought” their high productivity ratio with every productivity ratio with every conceivable way of making labor conceivable way of making labor expensiveexpensive– High marginal tax rates (payroll and High marginal tax rates (payroll and
income taxes)income taxes)– Firing restrictionsFiring restrictions– Early retirement (55! 58!) with pensions Early retirement (55! 58!) with pensions
paid for by working peoplepaid for by working people– Lack of encouragement of market Lack of encouragement of market
involvement by teens and youthinvolvement by teens and youth
2727
The Decline in Europe’s E/N The Decline in Europe’s E/N Matters more than H/EMatters more than H/E
First, which age groups are suffering First, which age groups are suffering from higher unemployment in Europe?from higher unemployment in Europe?
Second, which age groups experience Second, which age groups experience lower labor force participation in Europe?lower labor force participation in Europe?
Third, how does it come together in the Third, how does it come together in the distribution of low E/N by age group?distribution of low E/N by age group?
Note: These graphs are for total Note: These graphs are for total population by age and blur male/female population by age and blur male/female differences.differences.
2828
Leisure? Leisure? Unemployment by AgeUnemployment by Age
Unemployment by age
0
5
10
15
20
25
total >15 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
2929
The “Peaked Hump” in The “Peaked Hump” in European LFPREuropean LFPR
0
10
20
30
40
50
60
70
80
90
total 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
3030
Putting it Together:Putting it Together:E/N by AgeE/N by Age
Employment rates
0
10
20
30
40
50
60
70
80
90
total 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74
3131
Decomposing the EU/US Decomposing the EU/US Difference Difference
in the E/N Ratioin the E/N Ratio
age distribution unemployment LFPR E/N ratio
EU EU EU 87.14
US EU EU 86.19
EU US EU 91.23
EU EU US 97.11
US US EU 90.77
EU US US 102.1
3232
Welfare Aspects of E/NWelfare Aspects of E/Nby Age Groupby Age Group
Youth enter late into Market EmploymentYouth enter late into Market Employment If we are assessing extra European If we are assessing extra European
“leisure”, how much if any credit do we “leisure”, how much if any credit do we give to youth? give to youth? – Disconnected from the market economyDisconnected from the market economy– American youth are expected to workAmerican youth are expected to work
Link with government support of higher Link with government support of higher education: tuition grants in Europe vs. education: tuition grants in Europe vs. peer-reviewed research grants in US peer-reviewed research grants in US – Plus state university subsidiesPlus state university subsidies
3333
The Welfare Effect of EarlyThe Welfare Effect of EarlyRetirement: Back-of-Envelope Retirement: Back-of-Envelope
HandoutHandout
Baseline: work age 20-65, retire 65-84Baseline: work age 20-65, retire 65-84 No saving, investmentNo saving, investment 30% tax finances pay-as-you-go pensions 30% tax finances pay-as-you-go pensions
with balanced govt budgetwith balanced govt budget– Tax finances equality of consumption in Tax finances equality of consumption in
retirement to consumption during work yearsretirement to consumption during work years Alternative retirement age at 55 requires Alternative retirement age at 55 requires
tax increase to 45.6%, 25.1% decline in tax increase to 45.6%, 25.1% decline in consumption during work years and consumption during work years and retirementretirement
3434
Time Allocation from Time Allocation from Freeman-SchettkatFreeman-Schettkat
Freeman average males & females, Freeman average males & females, workdayworkday
M=market, H=home production, M=market, H=home production, L=leisure, P=personal time (sleep)L=leisure, P=personal time (sleep)
I set P>9.0 as LeisureI set P>9.0 as Leisure
M H L PM H L P
Employed 8.0 2.5 4.5 9Employed 8.0 2.5 4.5 9
Unemployed 1.0 4.5 9.5 9Unemployed 1.0 4.5 9.5 9
3535
Welfare Valuation of LeisureWelfare Valuation of Leisure
Work time is chosen to equate marginal Work time is chosen to equate marginal utility of leisure to after-tax wageutility of leisure to after-tax wage
Diminishing marginal utility of leisureDiminishing marginal utility of leisure– Infra-marginal leisure valued > wageInfra-marginal leisure valued > wage– Extra-marginal leisure valued < wageExtra-marginal leisure valued < wage
Back-of-envelope. Back-of-envelope. – Value weekday and weekend leisure of both Value weekday and weekend leisure of both
workers and retired = 4/3 after-tax wageworkers and retired = 4/3 after-tax wage– Value hours switched from work to retirement Value hours switched from work to retirement
= 2/3 after-tax wage= 2/3 after-tax wage
3636
Welfare calculationWelfare calculation
With 55 retirement age, after-tax With 55 retirement age, after-tax wage is 25% lesswage is 25% less
Extra hours switched from work to Extra hours switched from work to retirement leisure are low-valued (2/3)retirement leisure are low-valued (2/3)
Total welfare = market consumption Total welfare = market consumption plus total value of leisure plus total value of leisure
Market consumption declines 25.1 Market consumption declines 25.1 percent, welfare declines 22.6 percent, welfare declines 22.6 percent, ratio 90% (i.e., leisure offsets percent, ratio 90% (i.e., leisure offsets 10%)10%)
3737
Conclusion about Leisure Conclusion about Leisure OffsetOffset
Europe’s decline in H/E, not all of this is Europe’s decline in H/E, not all of this is voluntary (Alesina)voluntary (Alesina)
Europe’s decline in E/N due to Europe’s decline in E/N due to unemployment and low labor force unemployment and low labor force participation of youth and early retirees, participation of youth and early retirees, virtually no leisure offsetvirtually no leisure offset
Freeman-SchettkatFreeman-Schettkat– Part of difference in H/N represents not leisure but Part of difference in H/N represents not leisure but
household productionhousehold production– German mothers cook at home, American German mothers cook at home, American
mothers go out to eatmothers go out to eat
3838
Turn the Tables on the U. S.:Turn the Tables on the U. S.:The “Disconnect” between The “Disconnect” between
Welfare and PPP-Adjusted GDPWelfare and PPP-Adjusted GDP
GDP Exaggerates U. S. GDP per CapitaGDP Exaggerates U. S. GDP per Capita– Extreme climate, lots of air conditioning, Extreme climate, lots of air conditioning,
low petrol prices, huge excess energy uselow petrol prices, huge excess energy use– U. S. urban sprawl: energy use, congestionU. S. urban sprawl: energy use, congestion– Crime, 2 million in prisonCrime, 2 million in prison
How much is this worth?How much is this worth?
3939
A Shrinking Explanation:A Shrinking Explanation:Declining Btu / GDPDeclining Btu / GDP
200
250
300
350
400
1940 1950 1960 1970 1980 1990 2000 2010
5
10
15
20
25
Btu/GDP
Btu per capita
4040
The EU-US Difference The EU-US Difference is only 2% of GDPis only 2% of GDP
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1980 1985 1990 1995 2000
4141
Other Additions or Subtractions Other Additions or Subtractions
from Europe’s Welfarefrom Europe’s Welfare Urban Congestion? Urban Congestion?
– London vs. NY?London vs. NY?– Paris vs. Chicago?Paris vs. Chicago?– Time spent in London underground vs. in Time spent in London underground vs. in
a Chicago automobile?a Chicago automobile? Prisons, perhaps 1% of GDPPrisons, perhaps 1% of GDP Undeniable U. S. superiority: housingUndeniable U. S. superiority: housing
– People value interior square feet (2X in People value interior square feet (2X in US)US)
– People value exterior land (4X in US)People value exterior land (4X in US)
4242
Putting it Together for 2004Putting it Together for 2004
EU/US Y/N = 68.8EU/US Y/N = 68.8– Average of GK 65.8 and EKS 71.8Average of GK 65.8 and EKS 71.8
EU/US Y/H = 89.2EU/US Y/H = 89.2– Average of GK 85.3 and EKS 93.1Average of GK 85.3 and EKS 93.1
Raise Europe:Raise Europe:– 67% of H/E difference (11.8) is leisure = 7.967% of H/E difference (11.8) is leisure = 7.9– 10% of E/N difference (8.6) = 0.910% of E/N difference (8.6) = 0.9– Half of Energy use difference = 1.0Half of Energy use difference = 1.0– Prisons and other = 1.0Prisons and other = 1.0
Europe’s welfare vs. U. S. = 79.6Europe’s welfare vs. U. S. = 79.6
4343
Paper #2 is the History: Paper #2 is the History: Revising the “Stanford School”Revising the “Stanford School”
Organized by time, pre-1913, 1913-50, Organized by time, pre-1913, 1913-50, 1950+1950+
Within time periods, political union vs. Within time periods, political union vs. other (USE device -- notice footnote 17)other (USE device -- notice footnote 17) – Political union vs. “newness”Political union vs. “newness”– The heavy role of government in creating The heavy role of government in creating
the late 19the late 19thth century U. S. growth miracle century U. S. growth miracle Within time periods, reversible or Within time periods, reversible or
nonreversible?nonreversible?
4444
Political Union: Political Union: Materials-intensive Materials-intensive
manufacturing manufacturing Wright, raw materials Wright, raw materials
– part of political union, not just natural endowment part of political union, not just natural endowment US has advantage in resources vs. individual nations, but US has advantage in resources vs. individual nations, but
not all of Europenot all of Europe No fear of Minnesota and Indiana going to warNo fear of Minnesota and Indiana going to war
– Wright: doesn't emphasize enough ag, transport, Wright: doesn't emphasize enough ag, transport, trade. The “Wells Fargo Wagon” trade. The “Wells Fargo Wagon”
Late 19Late 19thth Century: The Dynamo of Chicago Century: The Dynamo of Chicago– Fastest Growing City in the World: 1871-1929Fastest Growing City in the World: 1871-1929– James Cronon’s “Nature’s Metropolis”James Cronon’s “Nature’s Metropolis”– ““Devil and the White City”Devil and the White City”
4545
But it was not all Political But it was not all Political Union: Even a USE Would Union: Even a USE Would
Have LaggedHave Lagged Clear advantages of the New World (which U. Clear advantages of the New World (which U.
S. uniquely? Which others (C, AU, NZ, S. uniquely? Which others (C, AU, NZ, Argentina?)Argentina?) – AgriculturalAgricultural
Land intensity indirectly responsible for ascendancy of Land intensity indirectly responsible for ascendancy of American manufacturingAmerican manufacturing
– NewnessNewness Common language, self-selection of ambitious immigrants, Common language, self-selection of ambitious immigrants,
high motivation, labor mobilityhigh motivation, labor mobility
– American system of manufacturing (guns, watches, American system of manufacturing (guns, watches, British anquish at Crystal Palace 1851)British anquish at Crystal Palace 1851)
– PolicyPolicy Land for the railroadsLand for the railroads The Homestead Act!The Homestead Act!
4646
Post-1913: Exploiting the great Post-1913: Exploiting the great inventionsinventions
Vs. David-Wright on electricity in 1920s US mfgVs. David-Wright on electricity in 1920s US mfg– Much more emph needed on ICEMuch more emph needed on ICE– Much more emph needed on 1930-50, not just 1920sMuch more emph needed on 1930-50, not just 1920s
Huge US lead in exploiting both electricity and Huge US lead in exploiting both electricity and ICEICE – U. S. in 1929 had 80% of world motor vehicle U. S. in 1929 had 80% of world motor vehicle
productionproduction– U. S. in 1929 had 90% of world motor vehicle U. S. in 1929 had 90% of world motor vehicle
registrationsregistrations No mystery about the “Arsenal of Democracy”No mystery about the “Arsenal of Democracy”
4747
Post-1913: The Great Post-1913: The Great Compression Compression
Created rents for labor, promoted capital-Created rents for labor, promoted capital-labor substitution, reduced low-skill jobs labor substitution, reduced low-skill jobs
ImmigrationImmigration– Restrictive legislation in the 1920sRestrictive legislation in the 1920s– A respite for low-skilled workers (compare now)A respite for low-skilled workers (compare now)
Trade barriersTrade barriers– No importation of low-skilled labor via goods No importation of low-skilled labor via goods
(compare now via China) (compare now via China) New deal pro-union legislationNew deal pro-union legislation
– Pure rents for semi-skilled high-school drop-Pure rents for semi-skilled high-school drop-outsouts
4848
World War IIWorld War II!!The Victory of the ArsenalThe Victory of the Arsenal
The miracle occurred in an ad-hoc The miracle occurred in an ad-hoc system of government loose control system of government loose control over business improvisationover business improvisation
The basis was laid starting with The basis was laid starting with Henry Ford in 1914Henry Ford in 1914
Herbert Hoover did something goodHerbert Hoover did something good Role of the American system and the Role of the American system and the
engineerengineer References: Overy, WaltonReferences: Overy, Walton
4949
Post WWIIPost WWII
France: penetration of electricity and ICE: France: penetration of electricity and ICE: exactly 40 years laterexactly 40 years later– That wonderful Landes quoteThat wonderful Landes quote
Reversal of initial U. S. advantagesReversal of initial U. S. advantages– Raw materials Raw materials – Political union Political union – Newness depreciates Newness depreciates – Reversal of the Great compression Reversal of the Great compression
Did Europe do anything creative except catch up? Did Europe do anything creative except catch up? – Welfare stateWelfare state– Combining auto with public transportCombining auto with public transport
5050
The Great Paradox: The U. S. The Great Paradox: The U. S. FunkFunk
1973-95 followed by1973-95 followed byEuropean Funk after 1995European Funk after 1995
1973-95 Europe continues to exploit great 1973-95 Europe continues to exploit great inventionsinventions– Copies U. S. interhighway system but retains Copies U. S. interhighway system but retains
railroads and builds TGV railroads and builds TGV The teetering U. S. has run into diminishing The teetering U. S. has run into diminishing
returnsreturns– Old inventions, electricity and ICE, fade awayOld inventions, electricity and ICE, fade away– The Solow “computer paradox”The Solow “computer paradox”
1995-2004. Europe's productivity growth 1995-2004. Europe's productivity growth doesn't revive, the great European funk. doesn't revive, the great European funk.
5151
The Diagnosis for the The Diagnosis for the Turnaround:Turnaround:
Basic Paradox about ITBasic Paradox about IT Both Europe and U. S. Rapidly Both Europe and U. S. Rapidly
Adopted New Economy TechnologyAdopted New Economy Technology– Personal ComputersPersonal Computers– Web AccessWeb Access– Mobile PhonesMobile Phones
But Europe hasn’t taken offBut Europe hasn’t taken off Conclusion: Role of IT in U. S. revival Conclusion: Role of IT in U. S. revival
must have been exaggeratedmust have been exaggerated
5252
Output per Hour by Industry Group, EU and US, 1990-2003
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1990-1995 1995-2001
US ICT Pro
EU ICT Pro
US ICT Using
EU ICT Using
US Non-ICT
EU Non-ICT
Finding the Culprit Industries
5353
Where is the Difference? Where is the Difference? The Van-Ark DecomposionThe Van-Ark Decomposion
Explaining the difference in Europe Explaining the difference in Europe vs. US productivity growth post-1995vs. US productivity growth post-1995– 55% retail trade55% retail trade– 24% wholesale trade24% wholesale trade– 20% securities20% securities– Rest of the economy: ZERORest of the economy: ZERO
U. S. negative in telecom, U. S. negative in telecom, backwardness of mobile phonesbackwardness of mobile phones
5454
U. S. Retail MiracleU. S. Retail Miracle
Not uniform, concentrated in “large Not uniform, concentrated in “large stores charging low prices with self-stores charging low prices with self-service format”service format”
ALLALL of productivity gains post-1990 of productivity gains post-1990 attributable to attributable to NEWNEW establishments establishments and closing of old establishmentsand closing of old establishments
Average pre-1990 establishment had Average pre-1990 establishment had zero zero productivity growthproductivity growth
5555
Europe in RetailingEurope in Retailing
Not uniform – Carrefour, IkeaNot uniform – Carrefour, Ikea U. S. “Big Boxes” (Wal-Mart, Home Depot, U. S. “Big Boxes” (Wal-Mart, Home Depot,
Best Buy, Target)Best Buy, Target) Europe: Europe:
– Land-use regulation, planning approvalLand-use regulation, planning approval– Shop-closing restrictions on hoursShop-closing restrictions on hours– Central-city congestion, protection of central-Central-city congestion, protection of central-
city shopping precinctscity shopping precincts– Prohibition on discounting by large new storesProhibition on discounting by large new stores– Related to Phelps’ corporatismRelated to Phelps’ corporatism
5656
Not enough emphasis on new Not enough emphasis on new vs. oldvs. old
It’s not just that land-use planning It’s not just that land-use planning prevents Wal-mart from setting up a prevents Wal-mart from setting up a new big box on every highway new big box on every highway interchange in Europeinterchange in Europe
It’s that the MIX of retailing in Europe It’s that the MIX of retailing in Europe is heavily composed of small, old-is heavily composed of small, old-fashioned firmsfashioned firms– Walking down the street in Paris, all Walking down the street in Paris, all
those “green crosses”those “green crosses”
5757
Qualification: Qualification: Measurement IssuesMeasurement Issues
U. S. Lead in ICT Production U. S. Lead in ICT Production Exaggerated because part of Europe Exaggerated because part of Europe (Germany) doesn’t use hedonic price (Germany) doesn’t use hedonic price indexes for computersindexes for computers
Big measurement issues in wholesale Big measurement issues in wholesale and retail tradeand retail trade– Crediting trade for price declines in Crediting trade for price declines in
electronic goodselectronic goods– Failure to perform double deflationFailure to perform double deflation
5858
A New PaperA New Paper Marcel Timmer and Robert Inklaar, Marcel Timmer and Robert Inklaar,
Groningen GD-76, April 2005Groningen GD-76, April 2005 Results for MFPResults for MFP EU (4) USEU (4) USWholesale NIPA 1.3 2.7Wholesale NIPA 1.3 2.7Wholesale new 0.8 0.9Wholesale new 0.8 0.9Retail NIPA 1.4 4.6Retail NIPA 1.4 4.6Retail New 1.6 4.2Retail New 1.6 4.2Total Trade NIPA 1.3 3.6Total Trade NIPA 1.3 3.6Total Trade New 1.1 2.5Total Trade New 1.1 2.5
5959
Education and Education and University ResearchUniversity Research
U. S. leadership in secondary education, U. S. leadership in secondary education, 1910-401910-40
U. S. leadership in college education, post U. S. leadership in college education, post WWIIWWII
U. S. research universities America’s leading U. S. research universities America’s leading export industry even in dismal 1972-95, still export industry even in dismal 1972-95, still the envy of the worldthe envy of the world– Competition between state and privateCompetition between state and private– U. S. peer reviewed grants to young professors, not U. S. peer reviewed grants to young professors, not
young studentsyoung students– Contrast with Europe tuition subsidiesContrast with Europe tuition subsidies
6060
Let’s not Forget:Let’s not Forget:Germany is being Strangled by Germany is being Strangled by
EuroEuro No more monetary policyNo more monetary policy If inflation soars in Portugal or Ireland, If inflation soars in Portugal or Ireland,
German workers are unemployedGerman workers are unemployed Fiscal policy is strangled by the 3% deficit Fiscal policy is strangled by the 3% deficit
rulerule Germany is MUCH MORE threatened by Germany is MUCH MORE threatened by
Poland and Czech than U. S. by MexicoPoland and Czech than U. S. by Mexico Ross Perot was right in the wrong placeRoss Perot was right in the wrong place Different immigration dynamicsDifferent immigration dynamics
6161
Conclusion (for now)Conclusion (for now)
Economic research has focused on Economic research has focused on particular European problemsparticular European problems– Land use vs. big boxesLand use vs. big boxes– Employment taxes and low hours per Employment taxes and low hours per
capitacapita Broader issuesBroader issues
– Low fertility rate vs. retirement agesLow fertility rate vs. retirement ages– Stark contrast: Czech/Poland vs. MexicoStark contrast: Czech/Poland vs. Mexico– Stark contrast: U. S. can absorb Stark contrast: U. S. can absorb
immigrants and Europe cannotimmigrants and Europe cannot