Discussion of Bosworth-Discussion of Bosworth-Triplett on Transportation Triplett on Transportation

and Communicationand CommunicationRobert J. GordonRobert J. Gordon

Northwestern University and NBERNorthwestern University and NBERBrookings Workshop on Productivity in Services Brookings Workshop on Productivity in Services

Industries: Trends and Measurement Issues,Industries: Trends and Measurement Issues,November 21, 2003November 21, 2003

What the Authors Achieve in These What the Authors Achieve in These Two PapersTwo Papers

Extremely Clear and Valuable Explanation of Extremely Clear and Valuable Explanation of BEA and BLS Measurement MethodsBEA and BLS Measurement Methods BEA vs. BLS Coverage Differences Tied to SIC BEA vs. BLS Coverage Differences Tied to SIC

CodesCodes Table 4 for Trucking Excellent, Underlines ComplexityTable 4 for Trucking Excellent, Underlines Complexity Table 5 for Airlines LikewiseTable 5 for Airlines Likewise

Discontinuities in Methods, Coverage, DeflationDiscontinuities in Methods, Coverage, Deflation Whatever said later about Gordon (1992), B-T Whatever said later about Gordon (1992), B-T

do the BLS vs. BEA comparison MUCH betterdo the BLS vs. BEA comparison MUCH better Uniform Comparison of Labor Productivity Uniform Comparison of Labor Productivity

Growth Rates, BEA GO, BEA VA, BLSGrowth Rates, BEA GO, BEA VA, BLS

Beyond Accounting for BEA vs. Beyond Accounting for BEA vs. BLS, focus on BEA MFP GrowthBLS, focus on BEA MFP Growth

Uniform format to Link Labor Uniform format to Link Labor Productivity to MFPProductivity to MFP Contribution of Capital per WorkerContribution of Capital per Worker Contribution of Intermediate InputsContribution of Intermediate Inputs

Good Job of Highlighting Surprising Good Job of Highlighting Surprising Results, e.g.,Results, e.g., Disappearance of MFP Growth for Disappearance of MFP Growth for

AirlinesAirlines Unbelievably rapid productivity decline Unbelievably rapid productivity decline

for Radio-TVfor Radio-TV

Losing the Forest for the TreesLosing the Forest for the Trees

B-T Papers (both Transportation and B-T Papers (both Transportation and Communication) Communication) More Serious in the Transportation PaperMore Serious in the Transportation Paper Lose Sight of the Role of Purchased Lose Sight of the Role of Purchased

Capital in Creating Productivity GrowthCapital in Creating Productivity Growth They Use BEA data on Purchased They Use BEA data on Purchased

Materials as if they were fact rather than Materials as if they were fact rather than Measurement ErrorMeasurement Error

B-T produce the best evidence yet that B-T produce the best evidence yet that BEA VA vs. Intermediate is a fraudBEA VA vs. Intermediate is a fraud

My Discussant’s PerspectiveMy Discussant’s Perspective Point of Departure, my parallel paper on Point of Departure, my parallel paper on

Transportation in the Griliches CRIW Volume Transportation in the Griliches CRIW Volume (50 printed pages)(50 printed pages) (First reaction: B-T papers are too short, esp. (First reaction: B-T papers are too short, esp.

Communications!)Communications!) Natural Questions AriseNatural Questions Arise

Are Current Data for 1977-87 Overlap the Same?Are Current Data for 1977-87 Overlap the Same? Substantive Changes in Productivity Behavior Substantive Changes in Productivity Behavior

since 1987?since 1987? Balance between Measurement and Substantive Balance between Measurement and Substantive

AnalysisAnalysis We come back to Substance, no time for We come back to Substance, no time for

otherother

I’ve Got Three Main Points, Here’s I’ve Got Three Main Points, Here’s Big Point #1Big Point #1

Why Should We Expect Any MFP Growth in Why Should We Expect Any MFP Growth in Transportation?Transportation?

Why Should We Surprised if Measured MFP Why Should We Surprised if Measured MFP Growth Accelerates or Decelerates?Growth Accelerates or Decelerates? The Transportation Industry buys Big Boxes The Transportation Industry buys Big Boxes

and Engines to Propel the Boxesand Engines to Propel the Boxes Then It Puts Stuff Inside the BoxesThen It Puts Stuff Inside the Boxes Transportation Industry does no R&D, it’s all Transportation Industry does no R&D, it’s all

done by the makers of the Big Boxesdone by the makers of the Big Boxes GE Locomotives and Aircraft EnginesGE Locomotives and Aircraft Engines Boeing AircraftBoeing Aircraft Cummins, Detroit Diesel truck enginesCummins, Detroit Diesel truck engines

Thus the MFP Action for Thus the MFP Action for Transportation Must Reflect the Transportation Must Reflect the

Quality of the Boxes and EnginesQuality of the Boxes and Engines MFP Changes Hide Errors in the Price MFP Changes Hide Errors in the Price

Indexes for Capital Inputs in Indexes for Capital Inputs in TransportationTransportation

Simplest Example: AirlinesSimplest Example: Airlines The History of MFP Growth in Airlines The History of MFP Growth in Airlines

reflects unmeasured quality change reflects unmeasured quality change in the boxes and enginesin the boxes and engines Especially the transition to JetsEspecially the transition to Jets

What is the Evidence?What is the Evidence?

Rapid Measured MFP Growth in Airlines Rapid Measured MFP Growth in Airlines reflects unmeasured quality growth in reflects unmeasured quality growth in airline capital prior to 1977airline capital prior to 1977

Labor productivity growth reflects Labor productivity growth reflects changing growth in aircraft quality, changing growth in aircraft quality, DIMINISHING RETURNSDIMINISHING RETURNS 1935-69 7.1%1935-69 7.1% 1969-78 5.7%1969-78 5.7% 1978-87 3.8% (B-T 3.6% Table 2)1978-87 3.8% (B-T 3.6% Table 2) B-T 1987-2001 BEA GO 0.1%B-T 1987-2001 BEA GO 0.1%

But What About Those Obvious But What About Those Obvious Productivity Improvements?Productivity Improvements?

Airlines have cut back on the use of Airlines have cut back on the use of purchased inputs (travel agents), and purchased inputs (travel agents), and own-employees (res agents, CTOs)own-employees (res agents, CTOs)

Yet every innovation that allows Yet every innovation that allows airlines to cut back on its own airlines to cut back on its own employees comes from a supplier of employees comes from a supplier of capital goodscapital goods Web developersWeb developers Kinetics, one of the companies that Kinetics, one of the companies that

develops e-check-in kiosksdevelops e-check-in kiosks

Overall Conclusion on B-T Overall Conclusion on B-T Treatment of AirlinesTreatment of Airlines

They Miss Entirely the Role of Diminishing They Miss Entirely the Role of Diminishing Returns in the Growth of Capital Quality Returns in the Growth of Capital Quality

Diminishing returns in capital quality have Diminishing returns in capital quality have Reduced the Growth of Labor Productivity Reduced the Growth of Labor Productivity and MFPand MFP

Subtlety: Since 1980 Most Quality Subtlety: Since 1980 Most Quality Improvements in Capital Take the Form of Improvements in Capital Take the Form of Better Fuel Economy and Longer Range Better Fuel Economy and Longer Range (relevant only for international aviation)(relevant only for international aviation)

This All Should Come Out in Price Indexes This All Should Come Out in Price Indexes for Aircraft, but B-T don’t discuss this at allfor Aircraft, but B-T don’t discuss this at all

Beyond Airlines, What Role Does Beyond Airlines, What Role Does Capital Play?Capital Play?

TruckingTrucking Capital is the entire ball gameCapital is the entire ball game

Three types of capital improvementsThree types of capital improvements Size and fuel economy of enginesSize and fuel economy of engines Minor role of IT capital discussed by B-TMinor role of IT capital discussed by B-T But overwhelmingly the most important role of But overwhelmingly the most important role of

capital input was . . . capital input was . . . GOVERNMENT-FINANCED HIGHWAY GOVERNMENT-FINANCED HIGHWAY

CAPITAL!!CAPITAL!! Long-live Barbara’s Highway Capital!Long-live Barbara’s Highway Capital!

Explicitly taken into account in MFP Explicitly taken into account in MFP calculations for airlines and trucking in calculations for airlines and trucking in Gordon (1992), not mentioned in B-T (2003)Gordon (1992), not mentioned in B-T (2003)

What’s Left Besides Buying What’s Left Besides Buying Capital?Capital?

Transportation companies face a Transportation companies face a tradeoff between “improving service” tradeoff between “improving service” and “improving productivity”and “improving productivity”

Shorter check-in queues or faster Shorter check-in queues or faster baggage delivery requires baggage delivery requires More EmployeesMore Employees More or better capital (e.g., baggage More or better capital (e.g., baggage

scanners)scanners)

Second Big Conclusion, B-T don’t Second Big Conclusion, B-T don’t heed their own adviceheed their own advice

The BEA Gross Output Series Should be The BEA Gross Output Series Should be used in all Analyses of Industry used in all Analyses of Industry ProductivityProductivity

The BEA Value-added series are fatally The BEA Value-added series are fatally flawedflawed

This means that none of the B-T tables This means that none of the B-T tables should list either:should list either: Labor Productivity based on VALabor Productivity based on VA Contribution of Intermediate MaterialsContribution of Intermediate Materials MFP based on VAMFP based on VA

How Can I Reach Such an Extreme How Can I Reach Such an Extreme Negative Conclusion on VA?Negative Conclusion on VA?

Refer to B-T communications paper Refer to B-T communications paper p. 5p. 5 ““capital-type income reported to IRS on a capital-type income reported to IRS on a

company basis”company basis” ““Assignment of incomes requires a Assignment of incomes requires a

conversion to establishment basis”conversion to establishment basis” ““No good ways to make the conversion”No good ways to make the conversion” ““Likely to be significant inconsistencies Likely to be significant inconsistencies

between estimates of value added and between estimates of value added and gross output”gross output”

The Killer EvidenceThe Killer Evidence

Look at B-T Communications Paper, Figure Look at B-T Communications Paper, Figure 11

No resemblance BEA purchased input No resemblance BEA purchased input shares to Census input shareshares to Census input share

Census Share is Very StableCensus Share is Very Stable My Conclusion – all these tables should be My Conclusion – all these tables should be

redone to assume a near-constant redone to assume a near-constant materials sharematerials share

Get your white-out and cut out two lines in Get your white-out and cut out two lines in B-T Tables – “contribution of intermediate” B-T Tables – “contribution of intermediate” and “MFP based on VA”and “MFP based on VA”

More Killer Evidence that We More Killer Evidence that We Should Bury the BEA VA ProgramShould Bury the BEA VA Program

Look at Airlines, B-T Transportation Look at Airlines, B-T Transportation Paper Table 2Paper Table 2

What is the Contribution of What is the Contribution of Intermediate Inputs?Intermediate Inputs? 1977-87 per year +2.5%1977-87 per year +2.5% 1987-95 per year -2.3%1987-95 per year -2.3%

How Could Price-Deflated How Could Price-Deflated Intermediate Inputs Increase 25%, Intermediate Inputs Increase 25%, then Decline 19%??then Decline 19%??

Before Leaving AirlinesBefore Leaving Airlines

The B-T paper contains offhand The B-T paper contains offhand comments about changes in airline comments about changes in airline output qualityoutput quality

Fully treated in Gordon (1992)Fully treated in Gordon (1992) Increased seating density occurred Increased seating density occurred

1975-19821975-1982 No comments onNo comments on

Value of frequent-flyer awardsValue of frequent-flyer awards Narrowbody TV, e-kiosks, web bookingNarrowbody TV, e-kiosks, web booking

How I Remember the Iraq War How I Remember the Iraq War Mark I (Jan-Feb 1991)!!Mark I (Jan-Feb 1991)!!

Really Annoyed by Critics who Said Really Annoyed by Critics who Said Deregulation required people to connect Deregulation required people to connect by circuitous routesby circuitous routes

Watched CNN, started countingWatched CNN, started counting Did a complete count of the entire US Did a complete count of the entire US

airline network, 1978 vs. 1989, routes and airline network, 1978 vs. 1989, routes and frequenciesfrequencies

Concluded a huge increase in quality, Concluded a huge increase in quality, many more new routes than dropped many more new routes than dropped routesroutes

Conclusion #3: BEA Conclusion #3: BEA BackwardationBackwardation

BEA’s huge advance in benchmark revision BEA’s huge advance in benchmark revision of industry data, dated January 1991of industry data, dated January 1991

Forced me to redo my entire paper Forced me to redo my entire paper midstream between May 1990 conference midstream between May 1990 conference and 1992 publicationand 1992 publication

Changed from output indexes based on Changed from output indexes based on flawed deflators (noted by B-T) to volume-flawed deflators (noted by B-T) to volume-based indexesbased indexes

B-T tell us as of 1992 BEA has moved B-T tell us as of 1992 BEA has moved backwards to flawed PPIs (see B-T backwards to flawed PPIs (see B-T Transportation Fig 3)Transportation Fig 3)

B-T Are on Top of Conclusion #3, B-T Are on Top of Conclusion #3, they just bury and dismiss itthey just bury and dismiss it

Look at B-T Treatment of Railroads in Look at B-T Treatment of Railroads in Transportation PaperTransportation Paper

The B-T discussion of railroad output The B-T discussion of railroad output includes an excellent criticism of the includes an excellent criticism of the BEA use of the flawed PPIBEA use of the flawed PPI

Long live the discrepancies between Long live the discrepancies between the BLS productivity program and the the BLS productivity program and the BEA – at least the BLS eschews use BEA – at least the BLS eschews use of its own flawed PPI!of its own flawed PPI!

Railroads, What Are the Issues?Railroads, What Are the Issues?

Shift in the Composition of Output?Shift in the Composition of Output? Stark ComparisonStark Comparison

Boxcars of flight by unemployed in the Boxcars of flight by unemployed in the 1930s1930s

Cattlecars of the holocaustCattlecars of the holocaust Vs. today’s specialized larger cars for Vs. today’s specialized larger cars for

coal, graincoal, grain Union Pacific TV CommericalsUnion Pacific TV Commericals Containers are a form of outsourcingContainers are a form of outsourcing

Small Comments on Small Comments on CommunicationsCommunications

Analogy to Transportation: Almost all the Analogy to Transportation: Almost all the productivity growth is being produced by productivity growth is being produced by purchased capital input purchased capital input

Just as there was no discussion of deflators Just as there was no discussion of deflators for capital input in transportation, no for capital input in transportation, no discussion of deflators for capital input in discussion of deflators for capital input in broadcastingbroadcasting

Good discussion and use of best recent Good discussion and use of best recent research on deflators for communications research on deflators for communications capitalcapital

Caution regarding Broadcast Caution regarding Broadcast ProductivityProductivity

My Back YardMy Back Yard Huge Investment in late 1990s in Huge Investment in late 1990s in

Extending Digital Cable that “last Extending Digital Cable that “last mile”mile”

Is that properly decomposed into Is that properly decomposed into current expense and capital expensecurrent expense and capital expense

I am paying huge monthly cable bills I am paying huge monthly cable bills that are eventually going to amortize that are eventually going to amortize that investment ($100 + $40)that investment ($100 + $40)

Their Disappointing ConclusionTheir Disappointing Conclusion

We need (Trans, p. 22) “closer We need (Trans, p. 22) “closer integration of the two agencies’ work integration of the two agencies’ work on industry-level output and on industry-level output and productivity.”productivity.”

How about an alternative verdict?How about an alternative verdict? We need to have BEA abandon the current We need to have BEA abandon the current

methodology of its value-added programmethodology of its value-added program We should prohibit BEA from using PPI We should prohibit BEA from using PPI

deflators where an alternative volume-deflators where an alternative volume-based is availablebased is available

The Final Broad Perspective vs. The Final Broad Perspective vs. Where We were in 1992?Where We were in 1992?

Compared to that 1992 paper, are we better Compared to that 1992 paper, are we better off?off?

This paper contains critical indictments of This paper contains critical indictments of BEA measurement methods but buries them BEA measurement methods but buries them rather than highlighting themrather than highlighting them Flawed VA-materials decompositionFlawed VA-materials decomposition Flawed reliance on PPIs instead of volumeFlawed reliance on PPIs instead of volume

Paper’s lack of overall recognition that Paper’s lack of overall recognition that productivity gains in these industries come productivity gains in these industries come from purchased capital, not own-innovationsfrom purchased capital, not own-innovations