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  • Comments and Discussion
  • Robert J. Gordon and Daniel E. Sichel

Robert J. Gordon:

Economists were slow to recognize the post-1995 productivity growth revival in its early stages. Those of us who participated in panels on productivity issues at the January 1998 meetings of the American Economic Association recall no such recognition. Rather there was a singular focus on explaining the long, dismal period of slow productivity growth dating from 1972, especially in the context of Robert Solow's much-cited quip that "we can see the computer age everywhere except in the productivity statistics." From today's perspective it is understandable that several years had to elapse before the post-1995 revival could be distinguished from previous short-lived upward blips in productivity growth such as occurred in 1991-92.

Since 1999, however, the analysis of the post-1995 revival has become a growth industry, featuring an outpouring of analyses that attempt to quantify the sources of the revival, and especially the contribution of the "new economy," that is, of investment in information technology (IT). The paper by William Nordhaus joins a substantial literature that assesses the role of the new economy in the revival; it also provides original analyses of other aspects of the revival that have previously been ignored. I will begin by discussing Nordhaus's findings on these other issues and then turn to his controversial treatment of the new economy's contribution. Along the way I will try to reconcile Nordhaus's finding of a small new economy contribution with contrasting results in research by Steven Oliner and Daniel Sichel that the new economy overexplains the revival. I will conclude with the suggestion that Oliner and Sichel may have exaggerated the role of IT investment in the revival, thus leaving [End Page 245] open some support for Nordhaus's contrary conclusion, through another line of reasoning.

Nordhaus's paper is based on what he calls a "new approach to measuring industrial productivity." This measures productivity as the ratio of real value added by industry divided by hours of labor input, with both the numerator and denominator taken from published tables in the National Income and Product Accounts (NIPA). As Nordhaus emphasizes in his concluding section, this industrial decomposition of productivity growth in the NIPA provides a measure of the income side of GDP, which is smaller than the product side of GDP by the amount of the NIPA statistical discrepancy. Since the statistical discrepancy shifted from 0.4 percent of GDP in 1995 to -1.3 percent in 2000 (that is, the income measure was smaller than the product measure in 1995 and larger in 2000), the exclusive use of income-side measures in Nordhaus's paper adds 0.34 percentage point a year to the annual growth rate of productivity during the 1995-2000 interval compared with studies based on product-side data.

Three caveats apply to his approach. First, it differs from other analyses, for example those in the 2000 and 2001 Economic Report of the President, which regard an average of the product-side and the income-side measures as superior to exclusive reliance on one or the other; to use only the income-side measure assumes knowledge about the sources of the statistical discrepancy that does not exist. Second, this approach is not "new." Use of NIPA data to analyze productivity behavior by industry goes back at least three decades to Nordhaus's own pioneering paper on this topic,1 if not before, and the same data have been compiled in the same way in several recent papers.2 Third, Nordhaus's database is limited to output and hours and contains no information on capital input by industry; so, unlike the recent paper by Jack Triplett and Barry Bosworth,3 Nordhaus has nothing to say about the behavior of total factor productivity and particularly about the role of IT capital deepening as a source of the productivity growth revival across industries.

None of these caveats apply to Nordhaus's original and ingenious decomposition of changes in productivity growth into a pure productivity effect, a Baumol effect, and a Denison effect. This decomposition is [End Page 246] closely related to the pioneering...

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