Recent rapid improvements in technology, coupled with a high level of investment in new computers, have boosted productivity so strongly that the U.S. economy should be able to grow 3 percent a year during the coming decade without causing the nation's low unemployment rate to fall further, according to a study to be released today.
The study, by Macroeconomic Advisers, a St. Louis forecasting firm, was an attempt to dissect the sources of U.S. economic growth over the past half-century. It found that productivity growth accelerated so sharply beginning in 1995 that the rate now "rivals that of the 1950s and 1960s"--the period in which it grew faster than at any other time in modern U.S. history.
The analysis confirms the view of some economists and policymakers, including Federal Reserve Chairman Alan Greenspan, that technological gains and investment are producing sweeping changes in the way portions of the economy operate and raising prospects for continued robust economic growth in the future.
In a speech in Grand Rapids, Mich., yesterday, Greenspan said: "The American economy, clearly more than most, is in the grip of what the eminent Harvard professor Joseph Schumpeter many years ago called 'creative destruction,' the continuous process by which emerging technologies push out the old.
"This is the process by which wealth is created, incremental step by incremental step. . . . The remarkable, and partly fortuitous, coming together of the technologies that make up what we label IT--information technologies--has begun to alter, fundamentally, the manner in which we do business and create economic value, often in ways that were not readily foreseeable even a decade ago."
Macroeconomic Advisers was founded by economist Laurence H. Meyer, who left the firm to become a member of the Federal Reserve Board and no longer is connected with it. But it remains highly regarded and its work is used by government policymakers. The study is based on a particular mathematical description of the U.S. economy--known as an econometric model. The results of studies based on such models aren't necessarily definitive, but the analytical techniques involved are widely used in economic policymaking.
Productivity, the amount of goods and services produced for each hour worked, ordinarily varies partly because economic activity speeds up and slows down over time. To eliminate that source of variation, the new study focused on what it termed "potential productivity," which it defined as the level of productivity consistent with a rate of economic growth that would not trigger rapid inflation.
The study concluded that potential productivity growth had soared in recent years, jumping from a minuscule 0.3 percent in 1994 to 2.9 percent in the year ended June 30. Coupled with the growth of the labor force, that meant that the capacity of the economy to produce goods and services rose 3.7 percent over that recent four-quarter period. Actual economic growth was close to that figure, and the unemployment rate hardly fell while inflation remained low, to the surprise of many forecasters.
Joel Prakken, president of Macroeconomic Advisers, said that as with any such effort to separate and quantify the sources of economic growth, some caveats are in order.
For instance, "much of the conclusion of the paper derived from the rapid decline in the price of computers," Prakken said. "Is that being measured properly?"
Prakken raised that question because those prices have been falling so fast--an average of 20 percent a year since 1966 and much more steeply recently--that an accurate measurement is at best extremely difficult.
But Prakken is confident the study is on solid ground in confirming that something significant has happened to the economy and that it is likely to have a lasting effect.
Of the 2.6-percentage-point jump in potential productivity growth, the study attributes a full percentage point to increased investment in computers and other equipment and 0.9 percentage points to a rise in the rate of technical advance, which includes rapid improvements in the quality of computers and methods of measuring inflation. The remaining 0.6 percentage points is what the study calls "an unexplained residual." (The numbers don't quite add up because of rounding.)
The improvements in the Labor Department's methods of measuring inflation lowered the inflation rate and thereby increased estimates of inflation-adjusted economic growth. That, in turn, automatically raised reported productivity growth by 0.2 percentage points, according to the study.
The strong increase in business investment in recent years has been particularly important because so much of it has been spending on computers, though purchases of other types of equipment has had an impact too.
"Given our forecasts of investment spending and the labor force, and assuming that computer prices continue to fall [at the same rate they have been]," the capacity of the economy to produce goods and services will increase 3.5 percent over the next year and could average as high as 3 percent over the next decade, the study said.
But the Commerce Department next month will revise the way in which it historically has treated business spending for computer software. If software hasn't been installed on a computer when it is sold, the later purchase has been regarded as an expense and not a capital investment. Now it will be treated as a capital investment, a shift that will raise gross domestic product for 1996, for example, by about 1.5 percent.
This change will also raise estimates of both productivity and the size of the nation's stock of computers, which fed into the Macroeconomic Advisers model probably would boost the firm's projected 3 percent potential economic growth rate for the coming decade, Prakken said.