 Good afternoon and welcome to this IEEE webinar. For many people who get involved in economics, one of the main reasons for doing so are questions about why economies sometimes boom and sometimes stagnate and why some are rich and some are poor. It is not an exaggeration to say that there is nobody on the planet who is more interesting and informed on these questions than our guest today, Professor Robert J Gordon. During his presentation of the next 25 minutes Bob will look at trends in productivity growth in Europe over the decades and draw some parallels with the United States. He will also look at how the pandemic has affected productivity trends and what sort of lasting impact there might be from the past 18 months of the changes it has brought about. Before taking your questions on these topics and I am sure on some of the other big and burning questions in macroeconomics today, let me share a brief bio. Bob is Stanley G. Harris Professor in the social sciences and professor of economics at Northwestern University in the United States. His recent work on the rise and fall of American economic growth and the widening of the US income distribution have been widely cited. And in 2016 he was named one of Bloomberg's top 50 most influential people in the world. He is author of the rise and fall of American growth, the US standard of living since the Civil War published in 2016. He is also author of macroeconomics 12th edition and the measurement of durable goods prices, the American business cycle and the economics of new goods. Our speaker today is also a distinguished fellow of the American Economic Association and a fellow of both the econometrics society and the American Academy of Arts and Sciences. The entire event today is on the record and my colleagues tell me to let you know to tweet to your heart's content at the handle at IIEA. With that over to our speaker today and many thanks for joining us. We very much look forward to your presentation the Q and A session afterwards. Delighted to be here. Let me announce the title of my talk, the transatlantic productivity slowdown, Europe chasing the American frontier. So let's start by identifying what I mean by Europe. What we often call Western Europe consists of the 15 nations that were in the EU prior to its enlargement in 2004. So that includes all five of the big nations, UK, France, Germany, Italy and Spain and almost all of the remaining Western European nations except for Norway and Switzerland. We're going to compare the path of productivity growth over the post war period for the EU 15 versus the United States. The time pass look quite different but there's some important similarities that I'm going to pull out. And to understand the slowdown, I'm going to both look at the usual way of decomposing the slowdown using growth accounting but I'm going to look at it another way which is perhaps more novel and more interesting and that is to ask which were the industries that contributed to the slowdown? Were they the same industries in Europe and in the United States? So here let's look at the post war history of productivity growth in the United States. There are four eras that we can distinguish. This goes, these are five year moving averages. So the dot you see here for 1955 is the average growth rate from 1951 to 55. And you see that there is an era of strong productivity growth near 3% going up to the late 60s. Then a slowdown from the early 70s through the mid 90s at about one and a half percent. Then a very notable revival up to almost back to 3% again for the five year period ending in 2003 and then a very demonstrable slowdown that left us with productivity growth of only about half a percent during the five years ending in the teens. There's been a revival in the last year and a half associated with the pandemic. We'll talk about that briefly at the end and you may have questions you wanted to forward to me about that. Here's Europe, it looks quite different. Europe had very rapid productivity growth coming out of World War II. So over the five year periods ending between 1955 and 1970, productivity growth averaged around 5% more than double the US during that period. Then there was a very rapid transition to a middle period going from the mid 70s through the mid 90s of about two and a half percent and then continuous slowdown with only a slight hint of a revival in the last year or two. If you put the US together with Europe, you see that we had a continuous period of Europe with faster growth, that is the level caught up to the US as we'll see in a minute. Then the US sprinted ahead in growth from the mid 1990s until the late 2000s and then both of them are tied with mediocre growth in the period of the teens. So just to summarize, Europe grew much faster from 1950 to 72. It was catching up for the dislocation in Europe caused by the interwar period and the two world wars when the United States was able more easily to exploit the new inventions that I'll talk about later. Inventions like the internal combustion engine and electricity. Europe slowed down, but I wanted to point out that during that 1972 to 95 slowdown period for Europe, productivity growth was roughly similar to that in the early post-war period for the US. And I'm gonna make quite a bit of that in a minute. Europe's productivity level caught up and exceeded the US in 1991 to 2002 and then fell behind again. Big mystery, why didn't Europe's growth rate respond to the digital revolution of the late 90s as did the United States during that period when the United States went ahead? Who's the level of European productivity compared to the United States? Starting off only half the level of US productivity catching up rapidly through the early 90s, then Europe actually surged ahead briefly and then has fallen back. During the decade of the teens, Europe was stuck at about 90% of the US level of productivity. And then it's turned down again with this US pandemic recovery. So this might surprise you because often everybody thinks the US is way ahead in technology and productivity. But actually, Europe did manage to catch up and is still at around 90%. So not at all a bad performance. Now, was the slowdown mainly caused by a slump in investment or something about technology? The growth accounting technique used by economists takes labor productivity growth, output per hour, subtracts the contribution of what is called capital deepening. That's the growth of capital per unit of labor. And we also make an adjustment, usually a very minor one for changes in the age, sex and education level of the labor force. When we do that, taking these capital deepening and labor composition subtracted from labor productivity growth and you get multi-factor productivity growth, which is the residual leftover after we've included everything we can measure and subtracted it out from measured productivity growth. We get this residual called multi-factor productivity growth. Back in the 1950s, a famous economist called this the measure of our ignorance because we really don't know what's causing it, although it's usual to associate it with innovation and technology. So looking at it with labor productivity growth on the left side of the equation, we can decompose labor productivity growth into three sources, the residual or multi-factor productivity growth, the capital deepening and the labor composition. So taking these four eras that I designated for the US, fast, slow, fast and then slow, we can decompose the sources of this productivity growth into green for total factor productivity growth or multi-factor productivity growth. Purple is the capital deepening and the little orange section on the right is labor composition, which as you can see is the same in all four eras. So for the United States, all the way up to 2005, we can conclude that investment was not part of the story. The purple area is about the same. The all the ups and downs of labor productivity growth were caused by the green area of capital deepening. Then the slowdown in the post-2005 period. And these data here only go up to 2015, but it would be very similar if I continue to 2019. That this last slowdown has been equally due to a slack investment that is capital deepening and a near disappearance in multi-factor productivity growth. Europe, as you can see, has had a steady slowdown from period one to two to three to four, not very different in the fourth period from the US. And if you can see for Europe, the blame for the slowdown is equally shared between slower investment in the purple area and slower factor, multi-factor productivity growth. So it has completely disappeared by 2005 to 2015 for the US almost disappeared. So if we look at the summary of the sources of growth analysis, changing multi-factor productivity growth is the big story for the United States in the first three intervals. And then capital deepening steps in to play a role in the final interval. In the European group of 10, the data on growth accounting here is for the 10 biggest of the 15 countries. The steady slowdown is explained roughly equally by multi-factor productivity growth in capital deepening. Labor composition doesn't add much and it doesn't change much. So the conclusion is, if you ask why productivity growth is slowed down, it's only partly because of inadequate investment that is the decline in capital deepening. Now I wanted to highlight the similarity. Here we have on a bar graph, what we've just seen in the previous slides, the four areas of productivity growth with dark red for the US and blue, of course, for Europe. I wanted to point out that in the early period, the US had productivity growth roughly equal to Europe's growth in the second period. So you can say that in the first period, the US was really exploiting those inventions that had been developed before World War II. Europe was catching up to what the US already had. And so Europe running about 20, 25 years behind had an experience between the early 70s and the mid 90s, very much like what the US had had in the previous two decades. So if we take this slowdown from what I call the early period, 1950 to 72 for the US, 1972 to 95 for Europe and compare it with the recent slow period, we get the arithmetic slowdown is exactly the same, something very interesting that people have not pointed out. So US started ahead, Europe caught up, but if we take allowance for the early start of the US, the slowdown to the decade of the teens was almost identical in both cases. Now, if we compare the early period for the US to the second period for Europe, we plot productivity growth for Europe in the vertical axis, productivity growth for the US on the horizontal axis. You can barely make out a very dim blue line that looks like this as you can see it right there. That's a 45 degree line. That would any dot like manufacturing, that's right on the 45 degree line. That says that productivity growth in Europe was absolutely identical to that in the US. If we're down here for an industry like trade, wholesale and retail trade, that says that productivity growth in Europe is lower than in the US. And anything above the 45 degree line like real estate, productivity growth in Europe was faster than in the US. So in this early period, we see a very great commonality in which industries are growing fast and slow. And interestingly, agriculture is the fastest and is right there on that 45 degree line. If we talk about what I call the early to late slowdown for the US, if we look at the industries, this is how much they're contributing to the slowdown and all the industries contributing to the slowdown in the US are producing goods rather than services with a single exception of wholesale and retail trade. And look at the big contribution being made by manufacturing. A common story that we may come back to is that manufacturing is really at the heart of the slowdown story. It's a big sector and it slowed down a lot in both Europe and the US. So here's the same picture for Europe, more uniform slowdown spread across many industries. But for Europe, all the bottom five industries in terms of the contribution of the slowdown are making goods rather than services. And again, manufacturing makes by far the biggest contribution. If you want the list of which industries are contributing to the slowdown the most, the list is the same for the US and Europe except retail and wholesale play more of a contribution for the US that's because they started out faster than in Europe. And in Europe, the professional administrative sort of white collar services are making more of a contribution than in the US. But in common, we have the five out of the six industries contributing to the slowdown are producing commodities rather than services. What about the contributions of this early delayed slowdown? Again, there's a 45 degree line which looks like this. It's a very pale blue line. Anything lying along that would say it's exactly the same in Europe and the US. So utilities, agriculture, transportation, manufacturing, education all contributed about the same to the slowdown in Europe. And when we see that across the great institutional divide of the Atlantic Ocean, we see so much uniformity across these industries. It really is a very prominent hypothesis that technology unique to each industry slowed down and that's reflected in multi-factor productivity and the commonality across the different industries in the two sides of the Atlantic. If you wanted to look at how much the total factor productivity versus capital deepening mattered across industries, here you see the slowdown and total factor productivity indicated by the green bars outweighs the few industries where multi-factor productivity increased and you see for the United States a relatively small role for the slowdown and capital deepening. By the way, the outstanding industry in the United States for total factor productivity is mining, which is the fracking revolution of all that oil that's deep under the ground that's been discovered in the US in the last 15 years. Same picture for Europe, more of a contribution of capital deepening that is more of the purple bars are over on the left and mining is doing very poorly in Europe where mining is mainly coal mining rather than oil. So the most important differences for the Europe versus the US is really remarkable similarity in which industries are causing the slowdown, highlighting retail and wholesale started out faster in the US and mining is a leader in the US and a lagger in Europe. Now, let's explore some hypotheses to explain the slowdown. I've already indicated, I think that the evolution of innovation unique to each industry is at the heart of the slowdown, but indeed part of Europe's catch up was due to the catching up in educational attainment which I'll show you in a second. Part of the European catch up was due to the massive reduction in hours work per employee, shedding less productive marginal hours. Europeans work hard when they're not on vacation. And of course, this decline in hours in Europe came with the transition in most European countries to the generous four and five week vacations which are unheard of in the United States where even paid vacations of two weeks are not common. A final idea is that the traditional division between MFP and capital deepening may overstate the role of capital deepening. And I'm gonna explain that separately in a minute. Here's the educational attainment in years of schooling. Europe started out at five grades of schooling. The United States started out in the early post war with eight and a half. The United States extended high school education rapidly. There's a kink here. Completion of high school was reached pretty uniformly in the United States around 1980 while Europe was still catching up. So this catching up with European education is part of the reason that Europe caught up in the level of productivity. Here are the hours of work per year starting off with Europeans working more than 2000 hours per year or more than 40 hours per week. But a very rapid decline in European hours per year as the vacations became pervasive. And as Europe benefited from things like family leave that again are much less generous in the United States where hours per year decline much more slowly. Now here's this point about capital deepening and saturating the effect of investment. In the context of the popular growth model associated with the name of Robert Solo, in the long run the ratio of capital to output is constant. So that means that output per hour and capital per hour in the long run have to have the same growth rate. That means anything other than investment that reduces the growth of output per hour reduces the growth of capital per hour, i.e. investment. So there is a reverse feedback. If anything happens to slow down the impact of innovation to make innovation a less powerful source of growth then that's gonna drag down growth and output that's gonna drag down growth and capital and it's gonna feedback to weak investment. And I think this is one of the reasons why investment has been so weak on both sides of the Atlantic in the last. 15 years. So what is this idea that innovation is becoming less potent, less powerful? I like to go back to the great inventions of the late 19th century sometimes called the second investor revolution. And they are led above all by electricity and all of its uses in industry and in households and the internal combustion engine of making possible cars, trucks and air travel. Chemicals and plastics also were part of the second investor revolution. And these industries and the revolution of the assembling line propelled US productivity from 1920 to 1970 and Europe with about a two decade lag propelled its productivity growth from 1945 to 1995. So that's the second investor revolution. What about the third investor revolution the so-called information and communications technology revolution or ICT? Robert Solo again, a name you've just heard looked at the data around 1987 and said in a memorable quote we can see the computer age everywhere but in the productivity statistics. And suddenly five years after Solo wrote the productivity statistics began to reflect the big impact of the ICT revolution in boosting US productivity growth as we have seen but not in Europe. Now I've done a separate paper analyzing what went wrong in Europe and the data tell us that the EU fell behind the United States in this 1995 to 2005 period both in producing ICT equipment and in using it. Productivity growth and producing ICT equipment during this 10 year interval was an unbelievable 17.5% per year in the US versus only 5% in Europe. If we separate out industries in the service sector that are intense users of ICT equipment the US had much faster growth in these industries than did Europe. And part of this is retailing in the United States with the famous big box stores that are much less common in Europe. There are much smaller differences across the Atlantic in industries that are not intensive in ICT use. A big puzzle which I'm not going to claim to have an answer to is if the EU lagged behind in 1995 to 2005 why didn't it catch up after 2005? I think the financial crisis and the turmoil in the European Union and the Euro back in the early teens had a lot to do with that. But once again, the pale blue line that looks like this is a 45 degree line. If we plot European versus American productivity growth in that revival decade of the late 1990s, early 2000s we've seen that across the board on average this is a regression line. Europe had about half the productivity growth of the United States and information and communications technology up here transportation and public affairs were industries where Europe did relatively well in terms of the use of technology but manufacturing again agriculture and trade were doing relatively poorly in addition to these other industries down here below the line. So these are the main conclusions I wanna reach in the formal part of my discussion. I've got some other slides to tell you if they become relevant in the question and answer period. So the conclusions are that Europe started out at 50% of the level of US productivity caught up by 1992 and fell back especially in that decade of 1995 to 2005. In the most recent decade going up to 2019 the EU and US productivity grew less than 1% per year uniformly not different. The common sources of the US and EU slowdown I think are the wearing out or using up of the innovation benefits of the second industrial revolution and the big difference across the Atlantic is the greater exploitation of the US by the US of the third industrial revolution the digital or ICT revolution particularly in the production of computer equipment but also in the use of the ICT equipment. So I'll say for the discussion period some reflections on what is happening during the pandemic in the United States and I can show you some results about that as well. So thank you for your attention and I look forward to your questions.