robert j. gordon center on capitalism and society, columbia university, february 28, 2005 europe’s...
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Robert J. GordonRobert J. Gordon
Center on Capitalism and Society, Center on Capitalism and Society,
Columbia University, Columbia University,
February 28, 2005February 28, 2005
Europe’s Standard of Europe’s Standard of Living Living
vs. the U. S.: Facts, vs. the U. S.: Facts, History, and DiagnosisHistory, and Diagnosis
How today’s Talk differs How today’s Talk differs from the two papersfrom the two papers
““Data, History, Diagnosis”Data, History, Diagnosis” Data: Replace crude post-1950 data with Data: Replace crude post-1950 data with
the latest and best OECD/Groningen the latest and best OECD/Groningen annual data: watch Europe fall backannual data: watch Europe fall back
The paper went to 2000, now we go to The paper went to 2000, now we go to 2004!2004!
History: The contribution is the History: The contribution is the organization of the facts and by time: organization of the facts and by time: 1870, 1913, 1950, 1973, 1995, 2000, 20041870, 1913, 1950, 1973, 1995, 2000, 2004
Diagnosis of Current European Malaise, Diagnosis of Current European Malaise, partly newpartly new
Understanding the Facts:Understanding the Facts:Y per capita vs. Y per hourY per capita vs. Y per hour
Standard of Living = Income per capitaStandard of Living = Income per capita– 1.3% growth, doubles every 53 years (Philippines)1.3% growth, doubles every 53 years (Philippines)– 5.6% growth, doubles every 12 years (Korea)5.6% growth, doubles every 12 years (Korea)
For very long-term growth or comparing rich For very long-term growth or comparing rich and poor nations, Income per capita and and poor nations, Income per capita and productivity are the same thingproductivity are the same thing
Not the same thing for short-term or Not the same thing for short-term or comparisons among rich nationscomparisons among rich nations
Y per capita vs. Y per hour is the crux of Y per capita vs. Y per hour is the crux of understanding the data on Europe vs. U. S. understanding the data on Europe vs. U. S.
How Productivity is Related to Output per Capita
Output (Q) Equal to the product of: Productivity (Q/A) Hours per Employee (A/E) Employment Rate (E/L),
that’s just (1 – U/L) Labor-force Participation
Rate (L/N) Working-age Population
(N)
N
L
L
E
E
A
A
Q
N
Q
How Could Europe be So Productive Yet So Poor
Output per Capita (Q/N)In Europe 75% of U. S.Productivity 95% of U. S.The Difference:
Hours per Employee (A/E) Employment Rate (E/L) Labor-force Participation
Rate (L/N)
N
L
L
E
E
A
A
Q
N
Q
Europe vs. the U. S. Europe vs. the U. S. since 1870since 1870
The History: Europe falls back 1870-1950 The History: Europe falls back 1870-1950 and then catches upand then catches up
The catch-up in 1995 was almost complete The catch-up in 1995 was almost complete in productivity (Q/A)in productivity (Q/A)
The catch-up since 1970 has been The catch-up since 1970 has been incomplete in output per capita (Q/N)incomplete in output per capita (Q/N)
Why?Why? The collapse of Europe’s A/NThe collapse of Europe’s A/N Why? The Disagreement with BlanchardWhy? The Disagreement with Blanchard Q/A: Europe is no longer catching up but Q/A: Europe is no longer catching up but
falling back. Why?falling back. Why?
Part #1: Lots of Data Slides,Part #1: Lots of Data Slides,What are the Data Issues?What are the Data Issues?
Thanks to Peter Neary AER Dec 2004:Thanks to Peter Neary AER Dec 2004: Geary vs. EKS vs. “QUAIDS”Geary vs. EKS vs. “QUAIDS”
Alternative methods of converting Ypc to Alternative methods of converting Ypc to international PPPinternational PPP Maddison (1820-1950) uses Geary-KhamisMaddison (1820-1950) uses Geary-Khamis OECD uses EKSOECD uses EKS Groningen web site gives bothGroningen web site gives both
My calculations from Neary for EU-15My calculations from Neary for EU-15 1980 Neary preferred QUAIDS = 741980 Neary preferred QUAIDS = 74 Average Groningen GK and EKS = 74Average Groningen GK and EKS = 74
The Broad Sweep of 2 Centuries:The Broad Sweep of 2 Centuries:Income per CapitaIncome per Capita
1000
10000
100000
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
Since 1960: Europe Fails Since 1960: Europe Fails to Converge and then Falls to Converge and then Falls
BehindBehind
1000
6000
11000
16000
21000
26000
31000
36000
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
Productivity since 1870:Productivity since 1870:Almost Catching Up is Not Almost Catching Up is Not
EnoughEnough
1
10
100
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
Productivity:Productivity:A Closer Look at Post-1960A Closer Look at Post-1960
0
5
10
15
20
25
30
35
40
45
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
The Europe / US Ratios The Europe / US Ratios Are Much More DramaticAre Much More Dramatic
0
20
40
60
80
100
120
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Output per hourOutput per capita
The Ratios Again:The Ratios Again:A Post-1960 Close-upA Post-1960 Close-up
40
50
60
70
80
90
100
110
1960 1965 1970 1975 1980 1985 1990 1995 2000
Output per hour
Output per capita
Ratios of Ratios:Ratios of Ratios:The Real Clue to What is Going The Real Clue to What is Going
OnOn
60
70
80
90
100
110
120
130
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Hours per employee
Employee to population ratio
Output per capita tooutput per hour ratio
Ratios of Ratios: Ratios of Ratios: The Post-1960 Close-upThe Post-1960 Close-up
60
70
80
90
100
110
120
130
1960 1965 1970 1975 1980 1985 1990 1995 2000
Hours per employee
Employee to population ratio
Output per capita tooutput per hour ratio
Hours per Employee Declined Hours per Employee Declined in Tandem until 1970, then in Tandem until 1970, then
divergeddiverged
0
500
1000
1500
2000
2500
3000
3500
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
A Close-up of Hours per A Close-up of Hours per EmployeeEmployeeafter 1960after 1960
1400
1500
1600
1700
1800
1900
2000
2100
2200
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
What Blanchard Neglects:What Blanchard Neglects:Employment per CapitaEmployment per Capita
30%
35%
40%
45%
50%
55%
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Europe - 15
United States
Employment per Capita:Employment per Capita:The Postwar Close-upThe Postwar Close-up
30%
35%
40%
45%
50%
55%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Europe - 15
United States
An Outline of Issues for An Outline of Issues for DiscussionDiscussion
Contra Blanchard, Europe’s failure to Contra Blanchard, Europe’s failure to converge is not a matter of voluntary converge is not a matter of voluntary vacations!vacations!
Much more is low employment per capitaMuch more is low employment per capita Even lower hours are not entirely voluntaryEven lower hours are not entirely voluntary ““If the French really wanted to work only If the French really wanted to work only
35 hours, why do they need the hours 35 hours, why do they need the hours police?”police?”
Short hours are a victory for parliamentary Short hours are a victory for parliamentary politics, not for free choicepolitics, not for free choice
What Matters is Ypc, What Matters is Ypc, not Productivitynot Productivity
Europeans have “bought” their high Europeans have “bought” their high productivity ratio with every productivity ratio with every conceivable way of making labor conceivable way of making labor expensiveexpensiveHigh marginal tax rates (payroll and High marginal tax rates (payroll and
income taxes)income taxes)Firing restrictionsFiring restrictionsEarly retirement (55! 58!) with pensions Early retirement (55! 58!) with pensions
paid for by working peoplepaid for by working people
Europe’s Low E/N Matters as Europe’s Low E/N Matters as much as Low A/Emuch as Low A/E
High UnemploymentHigh Unemployment High Youth UnemploymentHigh Youth Unemployment High long-term UnemploymentHigh long-term Unemployment
Low Labor-force ParticipationLow Labor-force Participation Of Youth (defer to Phelps on Italian 30-year-olds)Of Youth (defer to Phelps on Italian 30-year-olds) Of ElderlyOf Elderly Would you believe these French and Italian Would you believe these French and Italian
retirement ages?retirement ages? The OFCE seminar I organized on thisThe OFCE seminar I organized on this
Casual, just raise taxesCasual, just raise taxes Casual, just raise retirement ageCasual, just raise retirement age No Bush #43 hysteriaNo Bush #43 hysteria
Welfare Issues to be Postponed Welfare Issues to be Postponed for General Discussionfor General Discussion
GDP Exaggerates U. S. GDP per CapitaGDP Exaggerates U. S. GDP per Capita Extreme climate, lots of air conditioning, low Extreme climate, lots of air conditioning, low
petrol prices, huge excess energy usepetrol prices, huge excess energy use U. S. urban sprawl: energy use, congestionU. S. urban sprawl: energy use, congestion Crime, 2 million in prisonCrime, 2 million in prison
Undeniable U. S. advantage, all those Undeniable U. S. advantage, all those square feetsquare feet Inside the housingInside the housing Outside the housing in the residential lot sizesOutside the housing in the residential lot sizes
U. S. Medical Care InefficiencyU. S. Medical Care Inefficiency Raises Business Costs, like French taxesRaises Business Costs, like French taxes Inefficiency, InsecurityInefficiency, Insecurity
The History: The History: Reorganizing an Old StoryReorganizing an Old Story
Organized by time, pre-1913, 1913-50, Organized by time, pre-1913, 1913-50, 1950+1950+
Within time periods, political union vs. Within time periods, political union vs. other (USE device -- notice footnote 17)other (USE device -- notice footnote 17) Political union vs. “newness”Political union vs. “newness”The heavy role of government in creating The heavy role of government in creating
the late 19the late 19thth century U. S. growth miracle century U. S. growth miracleWithin time periods, reversible or Within time periods, reversible or
nonreversible?nonreversible?
Political Union: Political Union: Materials-intensive Materials-intensive
manufacturing manufacturing Wright, raw materials Wright, raw materials
part of political union, not just natural endowment part of political union, not just natural endowment US has advantage in resources vs. individual nations, US has advantage in resources vs. individual nations,
but not all of Europebut not all of EuropeNo fear of Minnesota and Indiana going to warNo fear of Minnesota and Indiana going to war
Wright: doesn't emphasize enough ag, transport, Wright: doesn't emphasize enough ag, transport, trade trade
Late 19Late 19thth Century: The Dynamo of Chicago Century: The Dynamo of Chicago Fastest Growing City in the World: 1870-1929Fastest Growing City in the World: 1870-1929 James Cronon’s “Nature’s Metropolis”James Cronon’s “Nature’s Metropolis” ““Devil and the White City”Devil and the White City”
But it was not all Political Union: But it was not all Political Union: Even a USE Would Have LaggedEven a USE Would Have Lagged
Clear advantages of the New World (which U. Clear advantages of the New World (which U. S. uniquely? Which others (C, AU, NZ, S. uniquely? Which others (C, AU, NZ, Argentina?)Argentina?) AgriculturalAgricultural
Land intensity indirectly responsible for ascendancy of Land intensity indirectly responsible for ascendancy of American manufacturingAmerican manufacturing
NewnessNewness Common language, self-selection of ambitious immigrants, Common language, self-selection of ambitious immigrants,
high motivation, labor mobilityhigh motivation, labor mobility American system of manufacturing (guns, watches, American system of manufacturing (guns, watches,
British anquish at Crystal Palace 1851)British anquish at Crystal Palace 1851) PolicyPolicy
Land for the railroadsLand for the railroads The Homestead Act!The Homestead Act!
Post-1913: Exploiting the great Post-1913: Exploiting the great inventionsinventions
Vs. David-Wright on electricity in 1920s US mfgVs. David-Wright on electricity in 1920s US mfg Much more emph needed on ICEMuch more emph needed on ICE Much more emph needed on 1930-50, not just 1920sMuch more emph needed on 1930-50, not just 1920s
Huge US lead in exploiting both electricity and Huge US lead in exploiting both electricity and ICEICE U. S. in 1929 had 80% of world motor vehicle U. S. in 1929 had 80% of world motor vehicle
productionproduction U. S. in 1929 had 90% of world motor vehicle U. S. in 1929 had 90% of world motor vehicle
registrationsregistrations No mystery about the “Arsenal of Democracy”No mystery about the “Arsenal of Democracy”
Post-1913: The Great Post-1913: The Great CompressionCompression
ImmigrationImmigration Restrictive legislation in the 1920sRestrictive legislation in the 1920s A respite for low-skilled workers (compare now)A respite for low-skilled workers (compare now)
Trade barriersTrade barriers No importation of low-skilled labor via goods No importation of low-skilled labor via goods
(compare now via China) (compare now via China) New deal pro-union legislationNew deal pro-union legislation
Pure rents for semi-skilled high-school drop-Pure rents for semi-skilled high-school drop-outsouts
World War IIWorld War II!!The Victory of the ArsenalThe Victory of the Arsenal
The miracle occurred in an ad-hoc The miracle occurred in an ad-hoc system of government loose control system of government loose control over business improvisationover business improvisation
The basis was laid starting with The basis was laid starting with Henry Ford in 1914Henry Ford in 1914
Herbert Hoover did something goodHerbert Hoover did something goodRole of the American system and the Role of the American system and the
engineerengineer References: Overy, WaltonReferences: Overy, Walton
Post WWIIPost WWII
France: penetration of electricity and ICE: exactly France: penetration of electricity and ICE: exactly 40 years later40 years later That wonderful Landes quoteThat wonderful Landes quote
Reversal of initial U. S. advantagesReversal of initial U. S. advantages Raw materials Raw materials Political union Political union Newness depreciates Newness depreciates Reversal of the Great compression Reversal of the Great compression
Did Europe do anything creative except catch up? Did Europe do anything creative except catch up? Welfare stateWelfare state Combining auto with public transportCombining auto with public transport
The Great Paradox: Europe’s The Great Paradox: Europe’s catching up stops after 1995catching up stops after 1995
1973-95 Europe, starting 40 years late, 1973-95 Europe, starting 40 years late, continues to exploit great inventionscontinues to exploit great inventions Copies U. S. interhighway system but retains Copies U. S. interhighway system but retains
railroads and builds TGV railroads and builds TGV The teetering U. S. has run into The teetering U. S. has run into
diminishing returnsdiminishing returns Old inventions, electricity and ICE, fade awayOld inventions, electricity and ICE, fade away The Solow “computer paradox”The Solow “computer paradox”
1995-2004. Europe's productivity growth 1995-2004. Europe's productivity growth doesn't revive, the great European funk. doesn't revive, the great European funk.
Topic #3: The DiagnosisTopic #3: The DiagnosisBasic Paradox about ITBasic Paradox about IT
Both Europe and U. S. Rapidly Both Europe and U. S. Rapidly Adopted New Economy TechnologyAdopted New Economy TechnologyPersonal ComputersPersonal ComputersWeb AccessWeb AccessMobile PhonesMobile Phones
But Europe hasn’t taken offBut Europe hasn’t taken offConclusion: Role of IT in U. S. revival Conclusion: Role of IT in U. S. revival
must have been exaggeratedmust have been exaggerated
Output per Hour by Industry Group, EU and US, 1990-2003
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1990-1995 1995-2001
US ICT Pro
EU ICT Pro
US ICT Using
EU ICT Using
US Non-ICT
EU Non-ICT
Finding the Culprit Industries
Where is the Difference? Where is the Difference? The Van-Ark DecomposionThe Van-Ark Decomposion
Explaining the difference in Europe Explaining the difference in Europe vs. US productivity growth post-1995vs. US productivity growth post-199555% retail trade55% retail trade24% wholesale trade24% wholesale trade20% securities20% securitiesRest of the economy: ZERORest of the economy: ZERO
U. S. negative in telecom, U. S. negative in telecom, backwardness of mobile phonesbackwardness of mobile phones
U. S. Retail MiracleU. S. Retail Miracle
Not uniform, concentrated in “large Not uniform, concentrated in “large stores charging low prices with self-stores charging low prices with self-service format”service format”
ALLALL of productivity gains post-1990 of productivity gains post-1990 attributable to attributable to NEWNEW establishments establishments and closing of old establishmentsand closing of old establishments
Average pre-1990 establishment had Average pre-1990 establishment had zero zero productivity growthproductivity growth
Europe in RetailingEurope in Retailing
Not uniform – Carrefour, IkeaNot uniform – Carrefour, Ikea U. S. “Big Boxes” (Wal-Mart, Home Depot, U. S. “Big Boxes” (Wal-Mart, Home Depot,
Best Buy, Target)Best Buy, Target) Europe: Europe:
Land-use regulation, planning approvalLand-use regulation, planning approval Shop-closing restrictions on hoursShop-closing restrictions on hours Central-city congestion, protection of central-Central-city congestion, protection of central-
city shopping precinctscity shopping precincts Prohibition on discounting by large new storesProhibition on discounting by large new stores Related to Phelps’ corporatismRelated to Phelps’ corporatism
Not enough emphasis on new vs. Not enough emphasis on new vs. oldold
It’s not just that land-use planning It’s not just that land-use planning prevents Wal-mart from setting up a prevents Wal-mart from setting up a new big box on every highway new big box on every highway interchange in Europeinterchange in Europe
It’s that the MIX of retailing in Europe It’s that the MIX of retailing in Europe is heavily composed of small, old-is heavily composed of small, old-fashioned firmsfashioned firms
Education and Education and University ResearchUniversity Research
U. S. leadership in secondary education, U. S. leadership in secondary education, 1910-401910-40
U. S. leadership in college education, post U. S. leadership in college education, post WWIIWWII
U. S. research universities America’s leading U. S. research universities America’s leading export industry even in dismal 1972-95, still export industry even in dismal 1972-95, still the envy of the worldthe envy of the world Competition between state and privateCompetition between state and private U. S. peer reviewed grants to young professors, U. S. peer reviewed grants to young professors,
not young studentsnot young students Contrast with Europe tuition subsidiesContrast with Europe tuition subsidies
Let’s not Forget:Let’s not Forget:Germany is being Strangled by Germany is being Strangled by
EuroEuroNo more monetary policyNo more monetary policy If inflation soars in Portugal or Ireland, If inflation soars in Portugal or Ireland,
German workers are unemployedGerman workers are unemployedFiscal policy is strangled by the 3% Fiscal policy is strangled by the 3%
deficit ruledeficit ruleGermany is MUCH MORE threatened by Germany is MUCH MORE threatened by
Poland and Czech than U. S. by MexicoPoland and Czech than U. S. by MexicoDifferent immigration dynamicsDifferent immigration dynamics
Conclusion (for now)Conclusion (for now)
Economic research has focused on Economic research has focused on particular European problemsparticular European problemsLand use vs. big boxesLand use vs. big boxesEmployment taxes and low empl per Employment taxes and low empl per
capitacapitaBigger issuesBigger issues
Low fertility rate vs. retirement agesLow fertility rate vs. retirement agesStark contrast: Czech/Poland vs. MexicoStark contrast: Czech/Poland vs. MexicoStark contrast: U. S. can absorb Stark contrast: U. S. can absorb
immigrants and Europe cannotimmigrants and Europe cannot