Transcript Discussion of Nordhaus on Alchemy and the New Economy

Discussion of BosworthTriplett on Transportation
and Communication
Robert J. Gordon
Northwestern University and NBER
Brookings Workshop on Productivity in Services
Industries: Trends and Measurement Issues,
November 21, 2003
What the Authors Achieve in These
Two Papers

Extremely Clear and Valuable Explanation of BEA
and BLS Measurement Methods

BEA vs. BLS Coverage Differences Tied to SIC Codes





Table 4 for Trucking Excellent, Underlines Complexity
Table 5 for Airlines Likewise
Discontinuities in Methods, Coverage, Deflation
Whatever said later about Gordon (1992), B-T
do the BLS vs. BEA comparison MUCH better
Uniform Comparison of Labor Productivity
Growth Rates, BEA GO, BEA VA, BLS
Beyond Accounting for BEA vs.
BLS, focus on BEA MFP Growth

Uniform format to Link Labor Productivity
to MFP



Contribution of Capital per Worker
Contribution of Intermediate Inputs
Good Job of Highlighting Surprising
Results, e.g.,


Disappearance of MFP Growth for Airlines
Unbelievably rapid productivity decline for
Radio-TV
Losing the Forest for the Trees

B-T Papers (both Transportation and
Communication)




More Serious in the Transportation Paper
Lose Sight of the Role of Purchased Capital in
Creating Productivity Growth
They Use BEA data on Purchased Materials as
if they were fact rather than Measurement
Error
B-T produce the best evidence yet that
BEA VA vs. Intermediate is a fraud
My Discussant’s Perspective

Point of Departure, my parallel paper on
Transportation in the Griliches CRIW Volume (50
printed pages)


Natural Questions Arise




(First reaction: B-T papers are too short, esp.
Communications!)
Are Current Data for 1977-87 Overlap the Same?
Substantive Changes in Productivity Behavior since
1987?
Balance between Measurement and Substantive
Analysis
We come back to Substance, no time for other
I’ve Got Three Main Points, Here’s
Big Point #1


Why Should We Expect Any MFP Growth in
Transportation?
Why Should We Surprised if Measured MFP
Growth Accelerates or Decelerates?



The Transportation Industry buys Big Boxes and
Engines to Propel the Boxes
Then It Puts Stuff Inside the Boxes
Transportation Industry does no R&D, it’s all done by
the makers of the Big Boxes



GE Locomotives and Aircraft Engines
Boeing Aircraft
Cummins, Detroit Diesel truck engines
Thus the MFP Action for
Transportation Must Reflect the
Quality of the Boxes and Engines



MFP Changes Hide Errors in the Price
Indexes for Capital Inputs in
Transportation
Simplest Example: Airlines
The History of MFP Growth in Airlines
reflects unmeasured quality change in the
boxes and engines

Especially the transition to Jets
What is the Evidence?


Rapid Measured MFP Growth in Airlines reflects
unmeasured quality growth in airline capital
prior to 1977
Labor productivity growth reflects changing
growth in aircraft quality, DIMINISHING
RETURNS




1935-69 7.1%
1969-78 5.7%
1978-87 3.8% (B-T 3.6% Table 2)
B-T 1987-2001 BEA GO 0.1%
But What About Those Obvious
Productivity Improvements?


Airlines have cut back on the use of
purchased inputs (travel agents), and
own-employees (res agents, CTOs)
Yet every innovation that allows airlines to
cut back on its own employees comes
from a supplier of capital goods


Web developers
Kinetics, one of the companies that develops
e-check-in kiosks
Overall Conclusion on B-T
Treatment of Airlines




They Miss Entirely the Role of Diminishing
Returns in the Growth of Capital Quality
Diminishing returns in capital quality have
Reduced the Growth of Labor Productivity and
MFP
Subtlety: Since 1980 Most Quality
Improvements in Capital Take the Form of Better
Fuel Economy and Longer Range (relevant only
for international aviation)
This All Should Come Out in Price Indexes for
Aircraft, but B-T don’t discuss this at all
Beyond Airlines, What Role Does
Capital Play?

Trucking


Three types of capital improvements




Size and fuel economy of engines
Minor role of IT capital discussed by B-T
But overwhelmingly the most important role of capital
input was . . .
GOVERNMENT-FINANCED HIGHWAY CAPITAL!!


Capital is the entire ball game
Long-live Barbara’s Highway Capital!
Explicitly taken into account in MFP calculations
for airlines and trucking in Gordon (1992), not
mentioned in B-T (2003)
What’s Left Besides Buying
Capital?


Transportation companies face a tradeoff
between “improving service” and
“improving productivity”
Shorter check-in queues or faster baggage
delivery requires


More Employees
More or better capital (e.g., baggage
scanners)
Second Big Conclusion, B-T don’t
heed their own advice



The BEA Gross Output Series Should be used in
all Analyses of Industry Productivity
The BEA Value-added series are fatally flawed
This means that none of the B-T tables should
list either:



Labor Productivity based on VA
Contribution of Intermediate Materials
MFP based on VA
How Can I Reach Such an Extreme
Negative Conclusion on VA?

Refer to B-T communications paper p. 5




“capital-type income reported to IRS on a
company basis”
“Assignment of incomes requires a conversion
to establishment basis”
“No good ways to make the conversion”
“Likely to be significant inconsistencies
between estimates of value added and gross
output”
The Killer Evidence





Look at B-T Communications Paper, Figure 1
No resemblance BEA purchased input shares to
Census input share
Census Share is Very Stable
My Conclusion – all these tables should be
redone to assume a near-constant materials
share
Get your white-out and cut out two lines in B-T
Tables – “contribution of intermediate” and “MFP
based on VA”
More Killer Evidence that We
Should Bury the BEA VA Program


Look at Airlines, B-T Transportation Paper
Table 2
What is the Contribution of Intermediate
Inputs?



1977-87 per year +2.5%
1987-95 per year -2.3%
How Could Price-Deflated Intermediate
Inputs Increase 25%, then Decline 19%??
Before Leaving Airlines




The B-T paper contains offhand comments
about changes in airline output quality
Fully treated in Gordon (1992)
Increased seating density occurred 19751982
No comments on


Value of frequent-flyer awards
Narrowbody TV, e-kiosks, web booking
How I Remember the Iraq War
Mark I (Jan-Feb 1991)!!




Really Annoyed by Critics who Said Deregulation
required people to connect by circuitous routes
Watched CNN, started counting
Did a complete count of the entire US airline
network, 1978 vs. 1989, routes and frequencies
Concluded a huge increase in quality, many
more new routes than dropped routes
Conclusion #3: BEA
Backwardation




BEA’s huge advance in benchmark revision of
industry data, dated January 1991
Forced me to redo my entire paper midstream
between May 1990 conference and 1992
publication
Changed from output indexes based on flawed
deflators (noted by B-T) to volume-based
indexes
B-T tell us as of 1992 BEA has moved backwards
to flawed PPIs (see B-T Transportation Fig 3)
B-T Are on Top of Conclusion #3,
they just bury and dismiss it



Look at B-T Treatment of Railroads in
Transportation Paper
The B-T discussion of railroad output
includes an excellent criticism of the BEA
use of the flawed PPI
Long live the discrepancies between the
BLS productivity program and the BEA – at
least the BLS eschews use of its own
flawed PPI!
Railroads, What Are the Issues?


Shift in the Composition of Output?
Stark Comparison





Boxcars of flight by unemployed in the 1930s
Cattlecars of the holocaust
Vs. today’s specialized larger cars for coal,
grain
Union Pacific TV Commericals
Containers are a form of outsourcing
Small Comments on
Communications



Analogy to Transportation: Almost all the
productivity growth is being produced by
purchased capital input
Just as there was no discussion of deflators for
capital input in transportation, no discussion of
deflators for capital input in broadcasting
Good discussion and use of best recent research
on deflators for communications capital
Caution regarding Broadcast
Productivity




My Back Yard
Huge Investment in late 1990s in
Extending Digital Cable that “last mile”
Is that properly decomposed into current
expense and capital expense
I am paying huge monthly cable bills that
are eventually going to amortize that
investment ($100 + $40)
Their Disappointing Conclusion


We need (Trans, p. 22) “closer integration
of the two agencies’ work on industrylevel output and productivity.”
How about an alternative verdict?


We need to have BEA abandon the current
methodology of its value-added program
We should prohibit BEA from using PPI
deflators where an alternative volume-based
is available
The Final Broad Perspective vs.
Where We were in 1992?


Compared to that 1992 paper, are we better off?
This paper contains critical indictments of BEA
measurement methods but buries them rather
than highlighting them



Flawed VA-materials decomposition
Flawed reliance on PPIs instead of volume
Paper’s lack of overall recognition that
productivity gains in these industries come from
purchased capital, not own-innovations