Lesenswerter Artikel zum US-Produktivitätsschwindel

verfasst von kingsolomon, 14.11.2002, 12:26

-->The “Productivity Miracle”: The Last New Era Myth That Refuses To Die

November 12, 2002

As might be expected, accumulating signs of greater economic stability over the decade of the 1990s fostered an increased willingness on the part of business managers and investors to take risks with both positive and negative consequences. Stock prices rose in response to the greater propensity for risk-taking and to improved prospects for earnings growth that reflected emerging evidence of an increased pace of innovation. The associated decline in the cost of equity capital spurred a pronounced rise in capital investment and productivity growth that broadened impressively in the latter years of the 1990s. Stock prices rose further, responding to the growing optimism about greater stability, strengthening investment, and faster productivity growth.”
- Federal Reserve Chairman Alan Greenspan, Jackson Hole, August 30, 2002

In a posting on his web site last Thursday, columnist Andrew Sullivan quotes an article by the New York Times on the latest batch of productivity statistics: “ ‘For the 12-month period ending in September, productivity grew at a rate of 5.3 percent, the strongest gain since the third quarter of 1983’... This must be a good sign for the long-term health of the economy,” Sullivan argues. No Andrew, it isn’t. The US productivity miracle is nothing more than a myth. The reported improvement in American productivity data in recent years is based solely on statistical errors, changes in our statistical procedures, and cyclical factors that are purely transitory. When one adjusts for these special factors, there is no evidence whatsoever of an improvement in US trend productivity.

Every mania appears to have its myth. Although purely extrapolative expectations during the best of times probably give birth to bubbles, the attraction such manias have for the general public probably rests to some degree on the “new era” myth that accompanies it. No doubt the degree to which professional money managers are willing to bypass the high fiduciary standards they are held to and to chase self-fulfilling prophecies is equally a function of the power of the myth accompanying the mania.

The bull market of the 1990s was underpinned by a number of these myths, most of which have been subsequently blown apart. In an earlier piece, we set forth a number of ways in which the stock market boom of the 1990s, coupled with a number of questionable accounting practices, contributed to an increasing degree to a misleading picture of the sustainable earnings power of several leading companies, particularly (but not restricted to) the high tech sector. The Enron debacle and its aftermath have pretty well exposed the extent of these fictions and illustrated the degree to which the bull market was built on a tissue of lies and accounting fraud. Standard setters are now targeting stock options again; after Enron, this is becoming harder to resist.

In fact, such has been the breadth of unsavoury activity in the stock market that investors now rank corporate accounting fraud ahead of the loss of wealth and"the state of the U.S. economy" as reasons for losing confidence in Wall Street over the past 2 1/2 years, a new investor survey shows. The Securities and Industry Association said Thursday that its latest survey found investor opinions about the securities industry at the lowest level since the surveys began in 1995.

Warren Buffett has made similar allusions to the fantasy/fraud underpinning the stock market when he suggested the following in a recent New York Times commentary (“Who really cooks the books?” New York Times, 24 July, 2002):

“The most flagrant deceptions have occurred in stock-option accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom. In calculating the pension costs that directly affect their earnings, companies in the Standard & Poor's index of 500 stocks are today using assumptions about investment return rates that go as high as 11 percent. The rate chosen is important: in many cases, an upward change of a single percentage point will increase the annual earnings a company reports by more than $100 million. It's no surprise, therefore, that many chief executives opt for assumptions that are wildly optimistic, even as their pension assets perform miserably. These C.E.O.'s simply ignore this unpleasant reality and their obliging actuaries and auditors bless whatever rate the company selects. How convenient: Client A, using a 6.5 percent rate, receives a clean audit opinion — and so does client B, which opts for an 11 percent rate.”

As Buffett notes, underfunded pension plans are a slow-moving freight train that has been bearing down on corporate America for years. This is forcing many of them to come clean and recognise the growing gap between what they have promised to pay pensioners and the value of the assets with which they are supposed to pay them. To be sure, many companies persist in indulging in fantasies by refusing to adjust their assumptions about expected future returns, but for the most part, the current climate has forced a major change on the practices of the private sector. As the SIA chairman Allen B. Morgan notes,"Our credibility and integrity are being questioned," SIA Chairman Allen B. Morgan Jr., chairman and chief executive of Morgan Keegan & Co., said in releasing the survey.

"Investors are extremely concerned about corporate accounting fraud and fear that they will lose money when investing. They want punishment of the wrongdoers," he said. Such is the degree of disenchantment that fraud ranks further ahead on a list of investors’ concerns than the fear of losing wealth (49 percent), the state of the U.S. economy (44 percent) and lack of trust in Wall Street (38 percent). Only 32 percent picked fear of terrorism.

Would that our government officials also come out just as cleanly on the subject of fraud and misrepresentation: it is striking to us that while companies - at least publicly - adopt a pose of shame in regard to corporate fictions that have been perpetuated over the last decade, the same cannot be said of government statisticians or, indeed, the Federal Reserve itself. Prominent amongst these examples, we have noted a number of pieces recently, which continue to celebrate the great American productivity miracle. In addition to the foregoing New York Times article cited by Andrew Sullivan, we have these comments on the latest set of statistics from the Bureau of Labor from University of California at Berkeley professor of economics, Bradford DeLong:

“Average hours per worker shrank at a 1.2% annual rate between the second and third quarters of 2002. The number of employees on payrolls rose at an 0.4% annual between the second and third quarters of 2002. thus total hours shrank at an annual rate of 0.8% between the second and third quarters of 2002.

Real GDP grew at a 3.1% annual rate between the second and third quarters of 2002.

Put these numbers together, and realize that when the Bureau of Labor Statistics calculates productivity growth for the third quarter of 2002, its estimate will be that productivity grew at a 4.0% annual rate.

Take the 7.6% growth rate of the last quarter of 2001, the 8.3% growth rate of the first quarter of 2002, the 1.7% growth rate of the second quarter, and now the third quarter's 4.0%, and realize that over the past four quarters America's measured economic productivity has grown by 5.4%.

This is an amazing performance for a time over which total hours worked have been falling.”

We have long commented on the use of the faulty “hours worked” series employed in this measure and Mr Greenspan’s own penchant for selectively using statistics to bolster a non-existent productivity miracle. In fact, over these past several years our measure of aggregate income has grown more rapidly than our measure of national expenditures. Our GDP accountants use our measure of national expenditure rather than that of income in estimating our GDP. They do so in part because it is their judgment that our statistics on expenditure are more reliable. In the 1980s, a similar statistical discrepancy between income and expenditures appeared. Eventually it was determined that our income measure was too high largely because profits were overestimated. This hasn’t stopped the Fed chairman, who also continues to affirm the validity of the so-called hedonic deflator, but we think that our analysis bears repeating here, given the anomalous extent to which this productivity myth refuses to perish along with all other New Era fantasies.

Some 3 years ago, Professor Robert Gordon of Northwestern University, a consultant to the Federal Reserve, published a widely read analysis of the alleged late 1990s productivity miracle. He first presented his paper before a Chicago Federal Reserve District Bank audience. While the productivity data has been recently revised, Gordon made one absolutely elementary and indisputable point that still holds: productivity tends to be above trend during business expansions and below trend during slowdowns and recessions. In other words, productivity is pro cyclical.



Gordon made one further noteworthy point: namely, that wherever productivity is surging today, it is narrowly related to computers. His work shows that there is no evidence of benefits of computers and other electronic equipment spilling over to the sectors that have heavily invested in them. In other words, the productivity miracle stems from the production of computers themselves. Unfortunately, it appears that this increase in measurable productivity is itself a function of the use of the so-called hedonic deflator. In his study, however, Gordon appears to accept the validity of employing this deflator as a given, but its use does create a huge historic discontinuity in the pre- 1986 data where no such measure was employed.



“Hedonic” refers in this instance to pleasure, as in the term “hedonism”. In recent years, some economists have sought to introduce a new approach to the theory of choice that helps to explain a number of phenomena that are difficult to explain or encapsulate within the confines of traditional economic theory. The hedonic deflator was initially employed to refine theories of consumer behavior or deal with the problem of quality variation. More recently, the methodology has been used to capture the true change in the utility (or the number of “utilities” to use the phraseology of philosophers Bentham and Mill) provided by computer.



One can understand why utility maximization plays such a profound role in the underpinnings of economics. Utility maximization requires of individuals both knowledge and purpose. Economic agents must be as well informed of their options as is possible, and they must diligently marry fact and reason in the market place to maximize the basket of goods and services available for their consumption over time, subject to their budget constraint. It is the basic tenet of economic science that if individuals armed with knowledge and reason engage in market transactions with all other self maximizing individuals, their collective pursuit of their own individual welfare will result in a set of prices and quantities for scarce resources that successfully optimizes the collective welfare or utility of all. Adam Smith’s invisible hand, like the wand of the symphony conductor, will orchestrate an optimally beneficial outcome for all participating in free exchange. Whatever small perturbations from this optimal solution may occur, the rational self-interest of individuals will move the economy back to this equilibrium. In this Panglossian vision, the unfettered market economy is the best of all possible worlds.



But events of the past few years have clearly demonstrated that this myth does not correspond to reality. In a study on this subject written in 1999, Allianz/Dresdner global strategist Frank Veneroso illustrates the problems inherent in the use of this methodology:



“A computer is a machine that once filled rooms; later it filled suitcase-sized boxes, and now it is just a few silicon chips in a box that fits into your briefcase. Even though the physical size of the computer has shrunk, it is clear that the PC’s computational and storage powers have increased. Today a computer using a single chip can do more computing than a computer that filled rooms several decades ago. Obviously, it does not cost much to mass-produce individual chips of silicon, no matter how sophisticated is the process of etching the circuitry on them. By contrast, it did cost a lot to produce the complex electronic apparatus that filled rooms decades ago. Clearly, the price of computing power has fallen, and hugely.



It is equally true that many goods and services in our economy have undergone similar, if not quite comparably radical, changes in price. Take the output of the health care industry. The first quality x-ray was not cheap to produce in the dollars of its day. Later, CAT scans were introduced. Then MRIs came along. MRIs are expensive, but in constant dollars they are not that much more expensive than x-rays were when they were just introduced. However the quality of the diagnostic picture has increased to an almost incalculable degree.



The pills you take to make you better are another case in point. In the 1920s, if you were sick you purchased an aspirin. It made you feel better, but it did not help cure your disease. In the 1930s, you could purchase a sulfa tablet, which cured some bacterial diseases. In the 1940s you could purchase a penicillin tablet, which cured many such diseases. Today you can buy a new wide spectrum antibiotic, which can cure virtually all bacterial diseases. Yet, adjusted for the change in the general price index, an off patent wide spectrum antibiotic costs little more than an aspirin tablet did in the 1920s.”



Veneroso goes on to explain that US government statisticians have never been satisfied that they can perform the normal division of the current dollar value of products undergoing significant quality changes into a price component and an output component. Therefore, American price indices do not even attempt to reflect the tremendous reduction in the cost of a unit of diagnostic information from an x-ray or CAT scan or a unit of bacterial killing power of a pill, largely because statisticians cannot “measure” such units of output.



But computers are unique in this regard in that they do produce an output that is uniform. We can measure units of computational power (MIPS) or memory storage (BITS). In 1986, after long debate, our government statisticians decided to measure the output of computer hardware in a new way. Measurement of prices would be adjusted for changes in terms of such discrete units of computer power or memory. As a consequence of this purely statistical change, the price of units of computer output in our economic data series started to fall rapidly. Because the dollar value of the industrial output of computers still grew at more or less the same rate, when the new computer deflator was applied to the change in the dollar value of output, the real or constant dollar value of computer output increased commensurately.



Over the last decade or so the decline in the price of a unit of computer power as measured by the government has accelerated. The price of such a functional unit supposedly fell at a 10% annual rate ten years ago; it now supposedly falls at a 30% rate. When one applies so furious a rate of price deflation in computer output to the dollar value of such output, the 10% annual rate of growth of the dollar value of the industrial output of computers of recent years explodes to an annual rate of increase in real output of 60%. In the nominal or current GDP accounts, that mere 1.2% of the economy contributed by the industrial production of computers adds little more than a tenth of a percent to our overall annualized nominal economic growth in any quarter. However, in our real or constant dollar GDP accounts---which is the GDP data that everyone focuses on---the application of the plunging hedonic deflator transforms that mere tenth of a percent to almost a full percent. Productivity, or labor productivity to be exact, is simply the increase in total output divided by the increase in total hours of labor employed to create that output. If our statisticians use a new more rapidly changing computer deflator to calculate real output, since the measurement of the denominator, growth in hours worked, doesn’t change, the entire consequent rise in our measure of real output is attributed to improving productivity.



Veneroso goes on to pose the question: “How can it be that Professor Gordon found that a mere 1.2% of the economy represented by the manufacture of computers accounts for virtually all of the measured increase in productivity in the economy since 1995 relative to prior decades?” The answer, he concludes lies in large part in the computer hedonic deflator. Only the computer sector has such a rapidly falling hedonic deflator. For years our statisticians have tried to make a similar adjustment for auto output by estimating quality enhancements. But for all our other goods and services, including sectors with rapid technological progress like health care, no such effort is made. The introduction of the hedonic deflator in 1986 in computers and the progressive increase in its rate of change over the last decade or so since its introduction has created a rise in the growth of real output and of productivity relative to prior decades that is now very significant and is of largely statistical origin.



As Rob Parenteau has noted more recently, “the reticence of the Fed to ease over the past five months is no doubt informed in part by their faith based economics on the productivity question. When Fed Governors, one after the other, get in front of microphones to say they think they have done enough to keep the US economy on a sustainable recovery path, this conclusion is in part informed by their perception of recent productivity trends, which remain above average as reported.” Ironically, this may be one of the reasons which explains why the Fed has hitherto been so loath to reduce rates, until last week. As the President’s chairman of the council of economic advisors wrote in a recent Financial Times article:



“This modern deflation scenario seems to make a lot of sense - until you get out your calculator. When you do, the basic features of the US economy look
quite good and deflation appears unlikely. To start with, analysis of the productivity data over the past six quarters confirms some of the best news that economists have delivered in a generation - the acceleration in productivity growth that began in 1995 continues unabated. Thanks to this, today's consumers can look forward to real incomes that grow much more quickly than they have during the past 30 years - a good omen for current consumption.”



Sure, there has been more layoffs, seems to run the argument. But think of the improved purchasing power of the remaining 93 per cent who are employed, an argument used to such destructive effect by the Bank of Japan during the Mieno era of the 1990s. Perhaps Hubbard and members of the Fed genuinely believe this myth if US-only productivity gains. So Mr Greenspan and his colleagues keep looking for the friendly consequences of that supposed fact; higher asset values, higher profits/if not higher wages, and a creative destruction process in investment spending. In so doing, they are clearly chasing the wrong path. Why, in particular, does the US have such a monopoly on alleged productivity gains in an internet and communications-intensive world? Why is Mr. Greenspan not challenged more seriously on this point? We can only surmise that the timing of these articles and the persistent efforts to legitimise them by the Federal Reserve chairman, imply a resolve to cling on to the last remaining foundations of the bull market, rather than concede that the whole of the 1990s was an Alice in Wonderland type fantasy in which the Chairman himself played a leading role. When will this last totem of the bull market fall?


Quelle: prudentbear.com

Thread gesperrt

 

gesamter Thread:

• Lesenswerter Artikel zum US-Produktivitätsschwindel - kingsolomon, 14.11.2002, 12:26