LONDON: Ten days ago something extraordinary happened in the markets. It had nothing to do with the five-year stock market lows, or the worries over accounting scandals. No, the foreign exchange markets moved substantially upon the publication of US trade data.
For nearly six years the mighty dollar was entirely insulated from trade data, one of the main determinants of currency market movements in conventional economic theory. The release of a new Star Wars film, or the details of President Clinton’s marital infidelity had a more substantial effect.
But now the herding masses of the markets have gone back to their textbooks. The balance of payments, the current account deficit and the way that productivity numbers are constructed are relevant again. And an overdue reassessment of the boom years of the late 1990s has been forced on economists by the revelation that high-profile firms overstated profits, and adopted irregular and possibly corrupt accounting practices to keep share prices buoyant.
Such practices were possible, even encouraged, by the climate of “new era” euphoria during the internet boom. The use of these technologies in the wider economy would, it was claimed, transform the way business was done.
The key anchor of “new era” economic thinking was the very rapid acceleration in productivity growth in the US from 1995-2000. This provided the firmest foundation for credible narratives about how technology would transform the US economy. The latest productivity numbers were stellar — 8.3 per cent, on an annualised basis, providing grounds for optimism that the shift in productivity was structural rather than a function of the booming cycle. But one quarter’s productivity data do not make a trend.
Over the past year the extraordinary productivity numbers recorded in the Clinton years have been revised down from “miracle” status of, say, 4.3 per cent for 2000, to a respectable 3 per cent. Average productivity growth between 1996 and 2000 now stands at 2.5 per cent.
“Europe envied the US high-tech boom of the late 1990s, but the US productivity revival was shortlived. Over the five years 1996-2000 the US briefly caught up to the European rate of productivity growth, but over any longer period, 1990-2000 or 1973-2000, the US growth rate lagged behind,” writes Professor Robert Gordon of Chicago’s North-western University in a recent paper.
But it doesn’t stop there. Today, US dollars 1,000 buys a lot more computer than it did in 1983.High-tech goods, semiconductors, computers and Lan networking equipment represent less than 8 per cent of US manufacturing output, but, adjusted for advances in quality, their production rose at an annual rate of around 50 per cent — accounting for two-thirds of the rise in US industrial production between 1995 and 2000.
Last year Alan Greenspan reported that the hedonic technique has been applied to items accounting for 18 per cent of US GDP. Gordon applies a hedonic adjustment to his new computer (US dollars 2,500), 28 times as powerful as the PC he purchased in 1983. “The US price index says my computer is worth US dollars 70,000 in 1983 dollars”, he told European bankers in Frankfurt. This has a huge effect when summed up across the economy.
Britain currently uses a milder form of adjustment called option pricing, but the UK’s Office for National Statistics is looking at applying hedonic adjustments.
Few economists dispute that appropriately adjusting for quality is essential. Gordon and others argue, however, that exponential growth in IT power is coming up against the fixed factor of the human brain and human time.
The internet has brought the world closer to theoretical perfect competition. Textbooks say such a highly competitive picture means firms have no pricing power, and zero profits are made. Indeed, argues Stephen King, chief economist at HSBC, the true effect of the technological upheaval of the past five years has been to break the link between productivity and profits. “High productivity no longer means high profits. The danger is that the profit share of GDP will be permanently lower,” he says.—Dawn/The Observer News Service.
