What were the reasons for Europe’s lag behind the US, in terms of productivity growth,

after the mid-1990s?

December 2008

Presentation: Martin Pospisil

Business in Global
Environment MN425

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 US Performance in 1990s

Between 1993 and 2000 the Clinton administration’s economic policy -> record-long economic expansion, strong GDP
growth, low, inflation and unemployment

Strong business investment high productivity.

The key factors: the optimal mix of fiscal and monetary policy, competitive and stable financial sector, and lots of
opportunities for investment.

Clinton faced huge budget debt and proved that the economy can recover while the government reduces its budget
deficit. All Clinton’s fiscal measures combined progressive redistribution and budget discipline.

Elimination of the budget deficit allowed Fed to lower interest rates, what was a motor to increased investments and
further economic growth.

Exceptional is economic stability of 1990s. Clinton-Greenspan mix of tight budgets and easier money contributed to
the outstanding economic performance.

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US economic performance during 1990s

Strong business
Low inflation
investment

Unemployment
High productivity
fell to 4 percent

Real economic
Largest budget
growth average
4.5 %/year
altogether surplus in history

US Economic performance in 1990s was outstanding

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US economic performance

1990s was a remarkable decade

A complete business cycle can be found in 1990s. Starting with recession in 1990-1991, continuing through “jobless
recovery” in 1992 that was likely to cause George Bush losing in the 1992 election. The years 1990-1992 set the stage
for the boom in the years 1993-2000. Finally, in 2000, the economy returned to approximately the same pint of
business cycle it had been in 1990.

Puzzlement among economists and policymakers: productivity growth

Institutions are vital for a well-working economy (Douglass North)

Successful market economies develop because a society created framework conductive for their development

Theory of property rights

In terms of institutions, the U.S. economy is one of the most favourable. Enforceable law and contracts, properly
defined property rights, they all are signs of the U.S. market system

Clinton-Greenspan mix of tight budgets and easier money contributed to the outstanding economic
performance.

Source: Complete if required

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The evolution from an industrial/manufacturing-based wealth producing economy into
a service sector asset based economy

The New Economy

Information Knowledge Internet Science Education

technology economy and
Digital Private R&D training
Influences Accelerated economy investments
social, growth of are keys for
economic, productivity E-commerce individual
and political success
systems
4x times
less
unskilled
jobs than in
1950s

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Explaining the US economic performance

Prices of computers fell down significantly

Short term Until 1999 prices of oil remained low

factors
US import prices were low BUT due to the appreciation of dollar and deflation some East Asia
countries put downward pressure on inflation

Skilful macroeconomic (both fiscal and monetary) + strong growth in income -> restrained long-
term interest rates and boosted private investments
Medium term
Independent monetary policy (not influenced by the government)
factors
Low and steady inflation

Deregulation: US has long been regulated less than most other industrialised economies
(trucking, banking, airlines, natural gas, telecommunications). -> the US economy is more
Long term efficient in the LR.
factors
Fundamental continuity of policy across administrations

Globalisation: free-trade orientation

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Innovation

Technology competition Competition and flexibility

Technological innovation Competitive goods and services market

IT revolution Flexible labour market

1990s decade of smooth advances in technology Dot com start up firms

Large decrease in prices of microchips !

Innovation

Accelerating productivity may tend to lower the natural rate of

unemployment NAIRU (because of the lag in wage increase)

Public sector

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Productivity

EU economic performance

Over the last thirty years, productivity growth has been much higher in Europe than in the United States (Blanchard
2004)

Productivity levels are roughly similar in the European Union and in the United States TODAY

Main difference: Europe has used some of the increase in productivity to increase leisure rather than income, while
the U.S. has done the opposite

GDP per person in the European Union, measured at purchasing power parity (PPP) prices, stands at 70% of GDP
per person in the United States. Not only that, but this ratio is the same as it was 30 years ago.

Problems with measuring productivity

Source: Blanchard (2004)

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Private sector productivity for comparable workforce,1950 - 2000

Indexed to US

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Labour productivity growth

Comment

Part of the Euro–pessimism is based on

evolutions since the mid1990s, and the
feeling that the U.S. is again gaining
advantage on Europe.

Manufacturing productivity growth outside

the IT producing sector has indeed declined

Contrary to wide spread perceptions, Europe

has done very well over the last 30 years

Level of productivity roughly equal to that of

the United States.

The income level has not caught up with that

of the United States , but only because of a
different choice between income and leisure.

Some sectors, trade in particular, have done

very well In the US; such an increase in
productivity growth has not been visible in
Europe;

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Labour productivity growth and GDP/person growth
The gap between the EU15 and the U.S. has remained
roughly constant
The gap between France and the U.S. has even increased
a little
Blanchard (2002)
Comment
Labour productivity, measured as GDP per hour worked
has increased much faster in Europe than in the United
States
As relative EU labour productivity increased relative hours
worked decreased in roughly the same proportion, leading
to a roughly constant relative GDP per capita.
Mediocre numbers on productivity growth in the late
1990s. But the underlying productivity growth is strong.
The role of IT? only part of the story. Distinguish between
IT production, IT use.
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Labour productivity growth, decade by decade

The average US productivity growth was even lower than

in 1950s and 1960s

Productivity growth it the natural hypothesis to explain the

good economic performance

BUT the average was not the crucial BUT low volatility

Over the 1990s, not very different. For the late

1990s,looks bad for Europe. But low numbers hide a more
complex picture.

No convincing quantitative answer. An educated guess.

Focus on employment creation, not productivity
growth, under pressure from governments.

Source: Department of Commerce and Mankiw (2001), Blanchard (2002)

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Comparison of US and Europe

US Europe

New technologies
Large decrease in hours worked per person in Europe as

the result of preferences leading to the choice of leisure

Globalisation, over income as productivity increased?

More integrated economy

Over 40 years, the catch up of Europe vis a vis the US is

Antitrust enforcement relatively good

Economic successes achieved during the Clinton

administration,

Scandals like Enron or WorldCom, Arthur Andersen failed

to set rules for accounting standards and financial markets
Stronger unions, less flexible labour markets and less
properly labour mobility

Regulated product markets

Too much of deregulation?

Common agricultural policy

Insufficient corporate governance?
Worse efficiency: relies less on stock market to allocate
capital

Reform of Social Security and Medical Service was not
German reunification
successful.

No strong European macroeconomic policy

Personal bankruptcies. personal savings rate plummeted

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References

NORTH, D. C.1996. Institutions, Institutional Change and Economic Performance, Cambridge, UK:Cambridge
1
University Press.
FRANKEL, J.A., ORZSAG, P.R., 2002. American Economic Policies in the 1990s.Massachusetts: Massachusetts
2
Institute of Technology
LITAN, R.E., and SHAPIRO, C. 2001. Antitrust Policy in the Clinton Administration. .Prepared for “American
3 Economic Policy in the 1990s,” June 27-30, 2001, Harvard University, Center for Business and Government, John
F. Kennedy School of Government.

4 STIGLITZ, J., 2003. The Roaring Nineties: Seeds of Destruction. New York: Allen Lane

5 YELLEN, B.J., 2001. The Fabulous Decade. Century Foundation Press

MANKIW, N.G., 2001. U.S. Monetary Policy During the 1990s. Center for Business and Government John F.
6
Kennedy School of Government Harvard University. American Economic Policy in the 1990s June 27-30, 2001.
BLANCHARD, OLIVIER. "The Economic Future Of Europe," Journal of Economic Perspectives, 2004, v18(4,Fall),
7
3-26.

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