Date created:7 May 2001 Last modified: 7 May 2001 Maintained by: John Quiggin John Quiggin
15 February 2001
The last few months have not been a good time for economic miracles. As late as November last year, we were still being told how the miraculous 'New Economy' had put an end to the business cycle in the United States. By Christmas, however, the Internet shakeout had turned into a full-scale collapse, with dozens of failures and downsizings every weak. Moreover, the downturn has spread from the flashy but economically inconsequential dotcoms to the large, and massively indebted, telecom sector, while the chronic decline of manufacturing has accelerated.
Belief in miracles is still strong, however, most notably with the idea that Alan Greenspan can make the whole problem go away by making marginal adjustments to interest rates. The longer such naive optimism clouds the thinking of US investors, the more the necessary adjustments will be delayed and the worse will be the subsequent pain.
If the American 'New Economy' miracle is looking seedy, the Australian productivity miracle seems to have performed a statistical vanishing act. Claims that microeconomic reform has delivered massive productivity benefits are based mainly on experimental estimates of multi-factor productivity made by the Australian Bureau of Statistics.
Initial estimates of multi-factor productivity growth for the period from 1993-4 to 1997-8 were hailed, notably by the Productivity Commission, as evidence of a 'miracle economy' with multi-factor productivity growth rates exceeding those of the 1960s 'golden age'. Moreover, whereas until the 1990s, capital productivity had declined as the capital-labour ratio increased, in line with standard economic theory, the ABS estimates showed increasing capital productivity during the 1990s.
When I checked the latest estimates, released late last year, I was surprised to find that this miracle had disappeared. The estimated rate of recent multi-factor productivity growth had fallen from a stellar 2.4 per cent to a rate of 1.7 per cent, fairly typical for the expansion phase of a business cycle. Moreover, instead of miraculously rising, capital productivity was falling in its usual unsurprising fashion.
Part of this decline was due to relatively poor productivity performance since 1998. However, the main action came from a revision of the earlier estimates of the capital stock and capital productivity. On inquiry, I found that this revision was actually made at the end of 1999, and was the subject of an update released shortly afterwards by the Productivity Commission and available on their website.
This finding was comforting in one way. Ever since the first claims of a productivity miracle, I had argued that a finding of rapid growth in capital productivity was inconsistent with relatively weak measured investment. By raising its estimate of the growth rate of the capital stock and lowering its estimate of capital productivity growth the ABS has resolved this puzzle.
On the other hand, I was dismayed to realise that I (and as far as I can tell, most other economists) had missed the release of the revised statistics, and had continued to argue on the basis of the Productivity Commission's original paper. In view of the wide publicity given to the original claims of a miracle, it is hard to see why the publication of revised estimates by the ABS and PC should have attracted so little attention.
Using the revised statistics, and assuming we are now approaching the peak of the current expansion, it is possible to make an assessment of a complete business cycle, beginning at the last cyclical peak in 1989. Since 1989, Australia has seen annual labour productivity growth of 2.6 per cent, capital productivity growth of -0.8 per cent, multifactor productivity growth of 1.2 per cent, and output growth, for the market sector, of 3.4 per cent.
The most startling feature of these numbers is the lack of any startling features. On all counts, output and productivity growth rates in the most recent cycle have been almost exactly equal to those for the entire period since 1965. Performance has been better than that of the 1980s, but not as good as that of the 1960s 'golden age'.
In macroeconomic terms, the recent cycle stands out as one of low inflation (an average rate of about 2 per cent) but high unemployment (an average of more than 8 per cent). The last five years have been particularly unimpressive, with unemployment falling only 1.5 percentage points despite steady expansion in output. Far from being miraculous, Australia's performance over the 1990s has been pretty ordinary.Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.
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