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‘Economic policy in the face of declining productivity growth’ by Nordhaus
European Economic Review 18 (1982) 159-162. North-Holland Publishing Company
COMMENTS
'Economic Policy in the Face of Declining Productivity Growth' by Nordhaus Jacques MAI RESSE Ecc,le des Hautes Etudes en Sciences Soeiales, 75006 Paris, France
It is said - - as a very rough distinction - - that there are two categories of coatributions in economics: little answers to little question, s and little answers to big questions. My overwhelming impression upon fir.~t reading William Nordhaus' article was that it clearly did not fall in the first category. A careful rereadiv.g confir.,.,-ned the view that, indeed, the article easily belongs to the second category: it provides us wit:h provocative and sensible reflections or, the important issues of the sources of the productivity slowdown and the possible pe, licy responses. It is always an interesting and usefiJl occasion when an a~ada:ious and knowledgeable person reminds us how small and fragile our answers to the great questions are, especially if at the same lime he informs us of his best guesses. One important virtue of Nordhaus' study is to .,show clearly that many more studies with little qt~estions and little answers are in order, if ultimately we want to have answer,'~, that is ones that are not disproportionately small to the big questions. I must confess, however, some uneasiness in making spedfic comments on such a general paper. In order to cope I decided to seek the help of a good friend who happens to be a very sceptical economist, l shall ignore my friend's comments on the part of the paper regarding the economic policy responses, which he feared might not be very helpful to any real policymaker, avd I sl~all restrict myself to some of his points about the importance of the various sources of the productivity slowdown, and also about the aggregate nature and the harmfulness of this slowdown. All these remarks, of course, are on]y attributable to my friend. (1) In his introduction, Nordhaus strongly affirn-s that the recent slowdown in productivity growth is 'the major economic ailment of modern industrial counlries.' Among the other economic ills he cites, however, he seems to forget unemployment. My friend considers this omission rather curio'as. In rna~y quart¢'rs in France, it is felt that the slowdown in labor 0014-2921/82/0000-0000/$02.75 © 1982 North-Holland
I~I
.1 .'~lair¢'s~e. ('ommt,,t~ts
o,~
the Nordhat~s paper
pr~ducli',il.~ growth vri:s perh~mps a s~,roke of luck. since it prevented hJ~,,her
~Jncmploymcnl. 121 Nordhau~ prt~,idcs tic Jr c,,idence of the slowdown in labor protlucttviI3 not only for the US. private non-farm business sector, but also fi~r the maior industr) groups and for other major O E C D countries. My friend, however, thinks this evidence is much too aggregate and may be parlly misleading: it should be supplemented by obserwtti..ms at a very detailed indus~.ry level and even at the level of the firm, both overall and by line , f acti~,;itv. In this respect, my friend was kind enough to mention a study of mi-l¢ with Zvi Griliches in which we obtained a diffe"ent picture' for Ihc so-called scientific industries in the U.S., i.e., chemicals, drug, s, electronics, inslr~Jments and computers [Oriliches and Mairesse (1980)]. In the case of Ihc,~c industries as a v~hole lif we follow the dar.a of the Bureau of Labor Slatisticsl a~ well as for a sample of about eighty large firms investing in tCcscarch arid Development IR & D), the puzzle is clearly the occurrence of an a~eleration of productivity in the recent period instead of a slowdown. I-tom 1960 ~.o 1965. the average: yearly rate of growth of labor productivity is about 4.0.-.-4.5",,. whereas that of total factor productivity is about 3.0'}o. t'rom 1966 to 1971 tht.' first rate of growth goes down to 3.O-3.5','/~, the .~econd to 0.5 i.0",,, in I.he recent period 1972-1977 the two rate:~ are back up again, respectively to 4.0--5.0",~, and 3.0-3.5,~,;,. Even if these figures were only partly believable. Ihey cc,ntrast with the general view of a declining productivity Jn manufacturing and in the economy at large. t31 Nordh;~us argues convincinlgly about his best guesses as to the sources of the productivity slowdown and their magnitudes. These are :~ummarized in ulblc 4 of hi.~ article. For the U.S. private busine:is sect:or, labor produc'~ivity toutput per hour worked) slows ,down by 2.5?'0 per year from 1948-1965 to ~973-1980, of which Nordhaus accounts for about 1.5,°,~, labeling the remaining 1.0,,, a mystery. Needless to say, my sceptical friend was not much convinceu. As a general warning, he began saying that he gives limited credit to such an analysis 'ft. la Denison" of the sources of productivity. According to him, in the last fifteen years the mos~ significant progress in this field ,of study was one of vocabulary rather than subs¢ance (apart from the :many advances in the production and diffusion of the statistical data): we do not speak anemore of explaining and finding the causes of output and producti"ity growth, but more modestly, if still ambiguously, of appraising the 'accounting frame-work' of growth and productivity. After this beginning, r.ny friend surprisingly undertook to give his ov, n "best guesses,' without of course putting much more faith in them than in those of No~,dhaus. First, my friend considers that an efft;ctive slowdown of 2.0%1 may be more likcl} than the measured slowdown of L5':., in table 4. The new orientation ~f grov.th f.owards quality of life, improved conditions of work and safety,
.I. Mai~esse, ('ommen,s ,m the Nordhaus paper
161
the protection of the envitronment arid so forth, should be fully reflected in tl~e true measures of production and productivity changes (i.e.. in terms of ec'onomic we.lfare or social value), and this may very well amount to ~t 0.5'!. difference w~,th the conventional measures. Being a coheren'L man, my fri,,,~na acknowledges that such improvements often take the form of new regulations. Tilus he is also relucta~Lt to follow Nordhaus land others) in regarding 'r,~:gulations' as a factor inhibiting the growth of (convemionally mea::ured) productivity, but prefers to view it as a factor contributin~g to the growth in tr ae economic productivity. Second, my friend shares Nordhaus' opinion that so-called 'cyclical" fa.ctt~rs (changes in the utilization rates of capital and labor) a:~d the effects of slow~:r economic growth (via 'increasing retur~as to scale in the short run and even tP~e lont~', run') play a large role [see Allsop (1981) for interesting views on the 'e~ndogeneity' of productivity at the macro level relative to economic grow!hi. He even advo,~:ates a 0.5"o figure rather than the 0.Y!~I in table 4. Third, as concerns capital, my :friend emphasizes the problem of m~.'.asurement. Available measures assume more or less fixed service lives, in the absence of any direct evid,:nce ab3ut the scrapping of used equipm,znt arid structures. It is plausible to think that the economic crisis: and the dramatic rise in energy 19rices have aaade a number of technologies too e×pensive and c,bsolete, there"~y indtcing earlier capital retirements and replacements. T]~. resulting overestimation of measured growth in the capital stock may well be as high as l.ff!,~, a year. Thus a 0.5", estimate for the efff':cts of the slower growth of ~capit~i stock' would appear more rcalistic them the 0.3'~o estimate in table 4. Fourtlh, my friend dismisses the (decliningl con~tribution of "labor quality" of 0.1,°~, as overly precise, and considers it equivalent to zero. He tends to round his own numbers to 0.5'~'.~,at least. Fifth, he thinks that the contribution of 'energy' should be treated together with that of raw materials. The wide..ranging study by Nordhaus 11980t, he nc~tes, concerns only the impact of the increase in the prices of oil (not ~ w materials nor e~,en energy as a whole). In a challenging recenl paper, hc~wever., Bruno (1981) clearly shows the analogy between an increase in the prices of raw materials with an autonomous technological regress, providing some econometric evidence that this may explain the measured productivity sk:wdown in Germany, Japan. the U.K. and the U.S. Without going so far as Brano.. ~t 0.5'~, figure would sccm more to the point than the 0.2"~ in table 4. .~ixth, our sceptic says that the estimate of 0.I",, for the influence of ~R & D' (lil~.e that .o,:~labor quality before) is too small to be given much credit. He is slii!~htly ironical about the inability of an expert like Zvi Griliches, to say no:hing of a layman like me, to offer any clear-cut ar~swer on that matter. ',:;eventh, at last ir, the ca~,;e of 'sectoral shifts' our man does not want !o quarrel with Nordhaus" estimate of 0.3~',;, even though he finds it t~,o
162
.I. Mairessc. Comments on the Nordha~,,s paper
prccise for his taste. However~. he mischievo~sly notes that in his 1972 Brookings paper Nordhaus had largely attributed the first slowdown of labor productivity in the U.S. in 1965-1971 to sectoral shifts, and, allowing for various qualifications, had predicted that there should not be a further slowdown in the years to come. Eighth, ~nd finally, according to his own best guesses my fritend, the sceptical economist, finds a smallish 0.2'~c, "unexplained' productivity decline in place of the 1~0 in the last row of Nordhaus' table 4. That is hardly, of course, to be considered very mysterious. Refe:rences AIt'~*F,. C. 1981. Growth. productivity and structural unemployment, P~..per presei~e~; at the l:t,~,Fn:an Economic Community Seminar on Technology, Capital and Employmenl :tt Pontil-"dousson I Newr College. Oxford). Brun~,. Mi~.hael. 1981. Raw materials, profits, And the productivity slowdown, NBEP working papel. AFril. (;rihches. Zvi and Jacques Mairesse. 1980. Productivity and research and development at the firm le~'el. NBI-R paper presented at the World Conference of the Eco~,ometric Society at Aix~en-Provcnce. Nordi~aus. William D., 1972. The recent productivity slowdown:. Brookings Papers on Economic Acti~,ily 3. 493 545. N~rdhuos. Wdliam D., 1980, Oil and economic performance in industrial countries, Brookings Papers on l:.c~momic Activily 2. 341--399.
COMMENTS
'Economic Policy in the Face of Declining Productivity Growth' by Nordhaus Jacques MAI RESSE Ecc,le des Hautes Etudes en Sciences Soeiales, 75006 Paris, France
It is said - - as a very rough distinction - - that there are two categories of coatributions in economics: little answers to little question, s and little answers to big questions. My overwhelming impression upon fir.~t reading William Nordhaus' article was that it clearly did not fall in the first category. A careful rereadiv.g confir.,.,-ned the view that, indeed, the article easily belongs to the second category: it provides us wit:h provocative and sensible reflections or, the important issues of the sources of the productivity slowdown and the possible pe, licy responses. It is always an interesting and usefiJl occasion when an a~ada:ious and knowledgeable person reminds us how small and fragile our answers to the great questions are, especially if at the same lime he informs us of his best guesses. One important virtue of Nordhaus' study is to .,show clearly that many more studies with little qt~estions and little answers are in order, if ultimately we want to have answer,'~, that is ones that are not disproportionately small to the big questions. I must confess, however, some uneasiness in making spedfic comments on such a general paper. In order to cope I decided to seek the help of a good friend who happens to be a very sceptical economist, l shall ignore my friend's comments on the part of the paper regarding the economic policy responses, which he feared might not be very helpful to any real policymaker, avd I sl~all restrict myself to some of his points about the importance of the various sources of the productivity slowdown, and also about the aggregate nature and the harmfulness of this slowdown. All these remarks, of course, are on]y attributable to my friend. (1) In his introduction, Nordhaus strongly affirn-s that the recent slowdown in productivity growth is 'the major economic ailment of modern industrial counlries.' Among the other economic ills he cites, however, he seems to forget unemployment. My friend considers this omission rather curio'as. In rna~y quart¢'rs in France, it is felt that the slowdown in labor 0014-2921/82/0000-0000/$02.75 © 1982 North-Holland
I~I
.1 .'~lair¢'s~e. ('ommt,,t~ts
o,~
the Nordhat~s paper
pr~ducli',il.~ growth vri:s perh~mps a s~,roke of luck. since it prevented hJ~,,her
~Jncmploymcnl. 121 Nordhau~ prt~,idcs tic Jr c,,idence of the slowdown in labor protlucttviI3 not only for the US. private non-farm business sector, but also fi~r the maior industr) groups and for other major O E C D countries. My friend, however, thinks this evidence is much too aggregate and may be parlly misleading: it should be supplemented by obserwtti..ms at a very detailed indus~.ry level and even at the level of the firm, both overall and by line , f acti~,;itv. In this respect, my friend was kind enough to mention a study of mi-l¢ with Zvi Griliches in which we obtained a diffe"ent picture' for Ihc so-called scientific industries in the U.S., i.e., chemicals, drug, s, electronics, inslr~Jments and computers [Oriliches and Mairesse (1980)]. In the case of Ihc,~c industries as a v~hole lif we follow the dar.a of the Bureau of Labor Slatisticsl a~ well as for a sample of about eighty large firms investing in tCcscarch arid Development IR & D), the puzzle is clearly the occurrence of an a~eleration of productivity in the recent period instead of a slowdown. I-tom 1960 ~.o 1965. the average: yearly rate of growth of labor productivity is about 4.0.-.-4.5",,. whereas that of total factor productivity is about 3.0'}o. t'rom 1966 to 1971 tht.' first rate of growth goes down to 3.O-3.5','/~, the .~econd to 0.5 i.0",,, in I.he recent period 1972-1977 the two rate:~ are back up again, respectively to 4.0--5.0",~, and 3.0-3.5,~,;,. Even if these figures were only partly believable. Ihey cc,ntrast with the general view of a declining productivity Jn manufacturing and in the economy at large. t31 Nordh;~us argues convincinlgly about his best guesses as to the sources of the productivity slowdown and their magnitudes. These are :~ummarized in ulblc 4 of hi.~ article. For the U.S. private busine:is sect:or, labor produc'~ivity toutput per hour worked) slows ,down by 2.5?'0 per year from 1948-1965 to ~973-1980, of which Nordhaus accounts for about 1.5,°,~, labeling the remaining 1.0,,, a mystery. Needless to say, my sceptical friend was not much convinceu. As a general warning, he began saying that he gives limited credit to such an analysis 'ft. la Denison" of the sources of productivity. According to him, in the last fifteen years the mos~ significant progress in this field ,of study was one of vocabulary rather than subs¢ance (apart from the :many advances in the production and diffusion of the statistical data): we do not speak anemore of explaining and finding the causes of output and producti"ity growth, but more modestly, if still ambiguously, of appraising the 'accounting frame-work' of growth and productivity. After this beginning, r.ny friend surprisingly undertook to give his ov, n "best guesses,' without of course putting much more faith in them than in those of No~,dhaus. First, my friend considers that an efft;ctive slowdown of 2.0%1 may be more likcl} than the measured slowdown of L5':., in table 4. The new orientation ~f grov.th f.owards quality of life, improved conditions of work and safety,
.I. Mai~esse, ('ommen,s ,m the Nordhaus paper
161
the protection of the envitronment arid so forth, should be fully reflected in tl~e true measures of production and productivity changes (i.e.. in terms of ec'onomic we.lfare or social value), and this may very well amount to ~t 0.5'!. difference w~,th the conventional measures. Being a coheren'L man, my fri,,,~na acknowledges that such improvements often take the form of new regulations. Tilus he is also relucta~Lt to follow Nordhaus land others) in regarding 'r,~:gulations' as a factor inhibiting the growth of (convemionally mea::ured) productivity, but prefers to view it as a factor contributin~g to the growth in tr ae economic productivity. Second, my friend shares Nordhaus' opinion that so-called 'cyclical" fa.ctt~rs (changes in the utilization rates of capital and labor) a:~d the effects of slow~:r economic growth (via 'increasing retur~as to scale in the short run and even tP~e lont~', run') play a large role [see Allsop (1981) for interesting views on the 'e~ndogeneity' of productivity at the macro level relative to economic grow!hi. He even advo,~:ates a 0.5"o figure rather than the 0.Y!~I in table 4. Third, as concerns capital, my :friend emphasizes the problem of m~.'.asurement. Available measures assume more or less fixed service lives, in the absence of any direct evid,:nce ab3ut the scrapping of used equipm,znt arid structures. It is plausible to think that the economic crisis: and the dramatic rise in energy 19rices have aaade a number of technologies too e×pensive and c,bsolete, there"~y indtcing earlier capital retirements and replacements. T]~. resulting overestimation of measured growth in the capital stock may well be as high as l.ff!,~, a year. Thus a 0.5", estimate for the efff':cts of the slower growth of ~capit~i stock' would appear more rcalistic them the 0.3'~o estimate in table 4. Fourtlh, my friend dismisses the (decliningl con~tribution of "labor quality" of 0.1,°~, as overly precise, and considers it equivalent to zero. He tends to round his own numbers to 0.5'~'.~,at least. Fifth, he thinks that the contribution of 'energy' should be treated together with that of raw materials. The wide..ranging study by Nordhaus 11980t, he nc~tes, concerns only the impact of the increase in the prices of oil (not ~ w materials nor e~,en energy as a whole). In a challenging recenl paper, hc~wever., Bruno (1981) clearly shows the analogy between an increase in the prices of raw materials with an autonomous technological regress, providing some econometric evidence that this may explain the measured productivity sk:wdown in Germany, Japan. the U.K. and the U.S. Without going so far as Brano.. ~t 0.5'~, figure would sccm more to the point than the 0.2"~ in table 4. .~ixth, our sceptic says that the estimate of 0.I",, for the influence of ~R & D' (lil~.e that .o,:~labor quality before) is too small to be given much credit. He is slii!~htly ironical about the inability of an expert like Zvi Griliches, to say no:hing of a layman like me, to offer any clear-cut ar~swer on that matter. ',:;eventh, at last ir, the ca~,;e of 'sectoral shifts' our man does not want !o quarrel with Nordhaus" estimate of 0.3~',;, even though he finds it t~,o
162
.I. Mairessc. Comments on the Nordha~,,s paper
prccise for his taste. However~. he mischievo~sly notes that in his 1972 Brookings paper Nordhaus had largely attributed the first slowdown of labor productivity in the U.S. in 1965-1971 to sectoral shifts, and, allowing for various qualifications, had predicted that there should not be a further slowdown in the years to come. Eighth, ~nd finally, according to his own best guesses my fritend, the sceptical economist, finds a smallish 0.2'~c, "unexplained' productivity decline in place of the 1~0 in the last row of Nordhaus' table 4. That is hardly, of course, to be considered very mysterious. Refe:rences AIt'~*F,. C. 1981. Growth. productivity and structural unemployment, P~..per presei~e~; at the l:t,~,Fn:an Economic Community Seminar on Technology, Capital and Employmenl :tt Pontil-"dousson I Newr College. Oxford). Brun~,. Mi~.hael. 1981. Raw materials, profits, And the productivity slowdown, NBEP working papel. AFril. (;rihches. Zvi and Jacques Mairesse. 1980. Productivity and research and development at the firm le~'el. NBI-R paper presented at the World Conference of the Eco~,ometric Society at Aix~en-Provcnce. Nordi~aus. William D., 1972. The recent productivity slowdown:. Brookings Papers on Economic Acti~,ily 3. 493 545. N~rdhuos. Wdliam D., 1980, Oil and economic performance in industrial countries, Brookings Papers on l:.c~momic Activily 2. 341--399.