Productivity Gains Are Cause for Optimism

After the recent revelations that major U.S. companies cooked their books to boost earnings, one may be forgiven for wondering if the much-ballyhooed "New Economy" in the late 1990s was an illusion, too. Not to worry, economists have documented that the productivity improvements over the latter half of the last decade were real, and are likely to continue sustaining economic growth, even as the equity markets swoon and consumer confidence falters.

Harvey Rosenblum, Senior Vice President of the Federal Reserve Bank of Dallas and current President of the National Association for Business Economics (NABE) believes "the remarkably good behavior of productivity during the recession taught us one important lesson. Those outsized efficiency gains of the late 1990s were not a cyclical or statistical fluke. The prospect of elevated productivity bodes well for the overall economic outlook. Even though we expect economic growth to average just above 3.5 percent though the end of 2003, little acceleration in inflation is likely."

A report by Harvard economist Dale W. Jorgenson that was recently released by the Progress and Freedom Foundation (PFF) explores the productivity growth phenomenon in greater detail. Jorgenson analyzed the roots of America's economic resurgence from 1995-1999 and concluded that much of the remarkable growth during this period was attributable to a dramatic decline in the price of information technology, fueled by cheaper and increasingly sophisticated semiconductors. Addressing attendees at the PFF's 2001 Aspen Institute, Jorgenson said, "A consensus is building that the remarkable decline in information technology (IT) prices provides the key to the surge in American economic growth. This technology has found its broadest applications in computing and communications equipment, but has reduced the cost and improved the performance of aircraft, automobiles, scientific instruments and a host of other products." Jorgenson noted "the investment boom of the later 1990s was not sustainable, since it depended on growth in hours worked substantially in excess of labor force growth. Nonetheless, growth prospects for the U.S. economy have improved considerably, due to enhanced productivity growth in IT production and rapid substitution of IT assets for non-IT assets in response to falling IT prices."