Information Technology and Productivity in the New Economy Kevin - - PowerPoint PPT Presentation

Information Technology and Productivity in the “New Economy”

Kevin Stiroh* Federal Reserve Bank of New York Washington Skills and Technology Conference July 2005

*The views expressed here represent those of the author only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

Outline

• The “new economy”
• IT and productivity growth
• Questions

The “New Economy”

What is the New Economy?

• New economy forces

– Information technology (IT) – Globalization – Deregulation

• New economy evidence

– Faster productivity growth (output/hour) – Low unemployment and low inflation – Strong stock market

What’s Left of the New Economy?

• Some parts faded

– Unemployment jumped to 6% in 2002 – Stock market, particularly tech, down since 2000

• Some parts remain robust

– Little inflationary pressure – Strong productivity growth (output/hour)

Focus on productivity growth and IT

Why Is Labor Productivity Growth Important?

• Productivity determines living standards
• Productivity helps offset inflationary pressures

U.S. Productivity Resurgence

• Productivity surged after 1995

Three Productivity Eras

• 3
• 1

1 3 5 7 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

• 3
• 1

1 3 5 7

4-quarter growth in nonfarm business labor productivity. Dotted line represents averages for 1947:Q4-1973:Q4, 1973:Q4-1995:Q4 and 1995:Q4-2005:Q1. BLS (6/3/05).

Percent Percent

47:Q4-73:Q4 = 2.6% 73:Q4-95:Q4 = 1.5% 95:Q4-05:Q1 = 3.0%

Current Productivity Picture

• Productivity surged after 1995
• Three sources of productivity

Three Sources of Productivity

• Capital deepening

– Investment provides more/better capital to labor – IT as an input

• Labor quality

– Compositional changes in the workforce

• Total factor productivity (TFP)

– Technology and everything else – IT as an output

Why is IT Important?

• Enormous technological progress

– Moore’s Law – Price of a calculation fell by a factor of 1.2 trillion since the turn of the century (Nordhaus, 2001) – Rapidly falling prices

Overall Price Level has Risen...

20 40 60 80 100 120 1959q1 1964q1 1969q1 1974q1 1979q1 1984q1 1989q1 1994q1 1999q1 2004q1

GDP Prices

GDP price index, BEA (5/26/05).

…While Computer Prices Fell

1 10 100 1,000 10,000 100,000 1,000,000 1959q1 1964q1 1969q1 1974q1 1979q1 1984q1 1989q1 1994q1 1999q1 2004q1

GDP Prices Computer Prices Computer Prices = -19.0% GDP Prices = +3.6%

GDP price index and computer price index, BEA (5/26/05).

Why is IT Important?

• Enormous technological progress

– Moore’s Law – Price of a calculation fell by a factor of 1.2 trillion since the turn of the century (Nordhaus, 2001) – Rapidly falling prices

• Massive investment by U.S. firms

– 40% of nonresidential business investment in information processing equipment and software ($484B in 2004) – Real IT investment grew 16% per year since 1959

IT Share of GDP is Rising

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 1959q1 1964q1 1969q1 1974q1 1979q1 1984q1 1989q1 1994q1 1999q1 2004q1

Percent

IT investment as a share of GDP. Current dollars, BEA (5/26/05).

IT and Productivity Growth

IT and Productivity: The Story

• Fundamental technological progress

– Moore’s Law – Huge productivity gains in IT-production

• Enormous declines in IT prices and increases in

IT quality

• Investment in IT

– Firms substitute toward IT – Productivity gains in IT-use

IT and Productivity: The Evidence

• Sources of U.S. productivity growth resurgence
• IT / productivity link across industries and countries
• Case studies of individual industries

IT Drives the U.S. Productivity Resurgence

1995-2003 less 1973-1995

TFP, Other 0.5 Capital Deepening, IT 0.5 Capital Deepening, Other 0.3 Labor Quality

• 0.1

TFP, IT- Production 0.3

Change

Increase in Labor Productivity Growth

Average annual contribution in percentage points for U.S. business sector. Source: Jorgenson, Ho, and Stiroh (2004).

1.6

What Does the Industry Data Say?

• Examine link between IT and industry productivity
• Compare three sets of industries

– IT-producing – IT-using – Other

Compare Post-1995 Productivity Gains

5 10 15 IT-Producing IT-Using Other

Productivity Growth (%)

1987-1995 1995-2000

Average annual percentages. IT-using have 1995 IT capital shares above the median. Update of Stiroh (2002) based on GPO data released in November 2002.

Productivity Gains through 2000 Concentrated in IT Industries ...

8.5 12.0

5 10 15 IT-Producing IT-Using Other

Productivity Growth (%)

1987-1995 1995-2000

Average annual percentages. IT-using have 1995 IT capital shares above the median. Update of Stiroh (2002) based on GPO data released in November 2002.

Productivity Gains through 2000 Concentrated in IT Industries ...

8.5 1.1 12.0 2.9

5 10 15 IT-Producing IT-Using Other

Productivity Growth (%)

1987-1995 1995-2000

Average annual percentages. IT-using have 1995 IT capital shares above the median. Update of Stiroh (2002) based on GPO data released in November 2002.

Productivity Gains through 2000 Concentrated in IT Industries ...

8.5 1.1 1.9 12.0 2.9 1.9

5 10 15 IT-Producing IT-Using Other

Productivity Growth (%)

1987-1995 1995-2000

Average annual percentages. IT-using have 1995 IT capital shares above the median. Update of Stiroh (2002) based on GPO data released in November 2002.

…Including Recession of 2001

8.5 1.1 1.9 12.0 2.9 1.9 8.8 2.4 1.4

5 10 15 IT-Producing IT-Using Other

Productivity Growth (%)

1987-1995 1995-2000 1995-2001

Average annual percentages. IT-using have 1995 IT capital shares above the median. Update of Stiroh (2002) based on GPO data released in November 2002.

International Comparisons

• Compare U.S. to Europe and OECD

1976-1995 1996-2003 Change U.S. 1.16 2.46 1.30 Euro Area 2.09 0.84

• 1.25

OECD 1.81 1.86 0.05 Spain 2.39 0.74

• 1.65

Japan 2.43 1.48

• 0.95

Canada 1.06 1.48 0.43

Note: Average annual growth in business sector productivity. Source: OECD Economic Outlook.

U.S. Shows Strong Productivity Gains after 1995

Explaining the U.S. / Europe Divergence

van Ark and co-authors

• Both have rapid growth in IT-production, but Europe

has smaller share

• Smaller gains in IT-using industries

– Particularly Retail and Finance – Labor and product market rigidities

• Faster growth in “New Europe” than in “Old Europe”

Case Studies

• Trucking Industry

– Electronic vehicle management systems and GPS – More efficient operations and monitoring – Fewer empty backhauls and less waiting to load/unload

• Emergency vehicles

– Computerized “enhanced 911” system – Better matching of equipment – Improved health outcomes and lower patient costs

• Retail

– Technology allows scale and scope – Better information on customers, inventories – Supply chain management

IT and Productivity

• Consensus that IT is important for productivity
• Evidence from many sources

– Aggregate – Industry – International – Firm

Productivity Outlook

• Project productivity growth for next decade
• Uncertainty about technological progress

– Pessimistic – Base-case – Optimistic

• Range of technology forecasts

– International Technology Roadmap for Semiconductors – Intel

Range of Productivity Projections

3.1 2.6 3.2 1.4

0.0 1.0 2.0 3.0 4.0 5.0

1995-2003 Pessimistic Base-Case Optimistic

0.0 1.0 2.0 3.0 4.0 5.0

Average annual growth rate for U.S. private sector. Source: Jorgenson, Ho, and Stiroh (2004). Percent Percent

Range of Output Projections

3.1 2.6 3.2 0.9 0.7 0.7 1.4 0.7

0.0 1.0 2.0 3.0 4.0 5.0

1995-2003 Pessimistic Base-Case Optimistic 0.0 1.0 2.0 3.0 4.0 5.0

Labor Productivity Hours

Average annual growth rate for U.S. private sector. Source: Jorgenson, Ho, and Stiroh (2004). 3.9 2.1 3.3 4.0 Percent Percent

Projection Conclusions

• Base-case projection of 2.6% labor productivity

growth for next decade

• Consistent with consensus view
• Implications

– Some cyclical decline from 2002-2004 pace – Some structural decline from post-1995 pace – No evidence of return to pace of 1970’s and 1980’s

Questions

What Changed in 1995?

• Acceleration of IT technological progress

– Shift to 2-year semiconductor cycle (Jorgenson, 2001)

• Widespread use of Internet and e-commerce

– (OECD, 2000) and Nordhaus (2000)

• Emergence of open-source software

– (DeLong, 2000)

• Learning-by-doing

Can IT Technological Progress Continue?

• Pessimistic view

– Diminishing returns (Gordon, 2000) – End of Moore’s Law (Mann, 2000)

• Optimistic view

– Silicon pipeline is full for the next decade or two – New technologies

• DWDM
• Blue lasers
• Molecular-scale electronics
• Nano and quantum computing
• Hard to predict long-run technological advances

Will Firms Continue to Invest in IT?

• Possible impediments

– Rising interest rates – National security – Decline in investment funds due to current account – Saturation point for IT

• Reasons for optimism

– Changes in “locus of innovation” and new applications

• Health care

– Relative price changes are driving investment

Does the “dot.com” Bubble Debunk the Importance of IT and Productivity?

• No
• Basic error was confusing productivity and profits
• Ultimate winner will be consumers as profits are

competed away and prices fall

Is IT the Whole Story?

• No
• Firms need complementary innovations

– Human capital – Organization structure – Information flows – Workplace practices

Conclusions

Conclusions

• IT has made important contributions to U.S.

productivity gains

• This is the core of truth in the “new economy” hype

– Technological progress lowers the price of IT – Lower prices spur IT investment

• Consensus that U.S. productivity growth will continue