Samuelson on Keynes
Decade of Greed II, by
Robert J. Samuelson
Boom-Time Battle, by Robert J. Samuelson
Call them cheerleaders and grumps -- they're rivals in the debate over the economy. Cheerleaders are believers. They see today's boom as a glorious reward for superior U.S. technology, management and faith in markets. The grumps are skeptics. Without denying the economy's virtues, they think that it's got a bad case of what John Maynard Keynes called "animal spirits": An overvalued stock market has powered an unsustainable consumer spending spree that will ultimately come to grief.
I am firmly in the grump camp, but its skepticism has so far proved too pessimistic or, at any rate, premature.
How this debate is finally settled (by future events, not argument) hinges heavily on one of the economy's central mysteries: productivity. In theory, it's simple. Productivity signifies efficiency. Suppose the economy produces 100 widgets a year with 100 workers; the next year, the same 100 workers produce 103 widgets. Labor productivity has risen 3 percent. Living standards, wages and profits all depend on productivity.
Throughout history, new technologies (from steel to telephones), better management and more highly skilled workers have generated huge gains in productivity and income.
The trouble is that economists have a hard time predicting productivity. Between 1947 and 1973, it grew about 3 percent annually, reports the Bureau of Labor Statistics. In this period, family incomes roughly doubled. Then productivity growth collapsed.
Between 1973 and 1994, it inched ahead about one percent annually. Income gains slowed to a crawl. Hardly anyone foresaw the productivity slowdown, and even after decades of study, it has not been convincingly explained.
But here's the good news: Since 1995, annual productivity growth has jumped to more than 2 percent. Aha, say the cheerleaders. We're right. The boom is solid. It's not a speculative bubble. Because productivity drives future wages and profits, its faster growth justifies today's high stock prices and gleeful consumer spending.
People have recognized -- even if some academics and grumps have not -- that the long-term economic outlook has brightened. Corporate profits and personal incomes will be higher than expected a few years ago. It's the "new economy."
Perhaps they are right. The case for a productivity breakout is strong. It starts with the decline of inflation and a host of forces (deregulation, foreign competition, corporate takeovers) that have made corporate managers focus more on cutting costs, improving efficiency and increasing profits.
With high inflation, companies could raise profits by raising prices. Gains were often illusory (because they simply reflected inflation) but created the impression of success. Now this is impossible. Imports, deregulation and takeover threats have compounded competitive pressures. Companies could lose markets and executives could lose their jobs. Danger concentrates the mind.
Then there's technology. Computers don't just enable companies to do things faster, argues economist Erik Brynjolfsson of the Massachusetts Institute of Technology. The real advantage is to allow companies to change the way they do things completely. Wal-Mart's Retail Link computer system allows the company and its suppliers (say, Procter & Gamble) to monitor store sales constantly. This lowers costs by minimizing unneeded inventories and calibrating orders quickly to what's selling. The Internet could similarly cut buying and selling costs.
Official productivity statistics may miss some of these gains. Consider ATMs. In 1996, there were 139,000 of them compared with about 85,000 bank branches. Open seven days a week and 24 hours a day, they represent a huge leap in customer service, says Brynjolfsson. Yet government statistics contend that banking productivity has fallen. One reason, he says, is that the government measures the output of the banking industry by counting the number of checks cashed. It's an outdated indicator.
All this is probably true. But there are other truths. One is that computers can also subtract from productivity. The Internet has so reduced the cost of moving information that it's encouraged a lot of worthless information. USA Today had a story last week about how companies are being swamped with e-resumes.
Another truth is that all this has happened before. There are always new technologies. In the early 1960s, commercial jets replaced propeller planes; companies started using computers as early as the 1950s. Are gains greater today? We don't yet know.
Some economists doubt a huge productivity rebound. Mark Zandi of Regional Financial Associates attributes almost half the recent gain to two statistical quirks. One involves improvements in the consumer price index. These changes reduce reported inflation and automatically raise "real" output and productivity. The other quirk, says Zandi, is an overestimate of the productivity of the self-employed, about 6.5 percent of the non-farm-labor force. Stripped of these influences, productivity is now rising about 1.5 percent annually, up from one percent, according to Zandi. Much of the gain, he says, comes from an older, more experienced work force.
Even more skeptical is Edward McKelvey of the investment banking firm of Goldman, Sachs. Since 1973, there have been two similar spurts of productivity growth for four-year periods (1975-78 and 1983-86), he notes. A strong economy made workers, factories and offices temporarily seem more productive. A sales clerk who sells $110 worth of goods a day is more "productive" (statistically speaking) than one selling $100. But when the economy slowed, there was a productivity "payback." Now the clerk sells only $95 worth of goods. McKelvey thinks this could happen again.
Although all these theories (for good and ill) are plausible, all cannot be true. A productivity explosion would make sense of today's economy. People could borrow more because higher future incomes would make repayment easier. Investors could pay more for stocks with higher future profits. Maybe.
But for my part, I suspect that people are simply more euphoric than farsighted.