Call me a hopeless optimist but I’m not ready to give in to the dreaded “R” word. But I must admit there are a few financial statistics that concern me. Tops among them is a Statistics Canada survey that indicates the nation’s manufacturers are concerned enough about current orders and inventories of finished products that they expect production to fall in the first three months of this year (see our story on page 8). That’s the first time they’ve felt this way since July 1998. In the U.S. it’s no better. In fact, it’s considerably worse. Manufacturing activity shrank in January for the sixth consecutive month. The economy south of the 49th is shrinking at an annual rate of 0.6 percent.

How did this happen? Wasn’t this, afterall, supposed to be the New Economy, which even Alan Greenspan, chairman of the U.S. Federal Reserve, believed was so different from any previous economic surge because the proliferation of information technology allowed businesses to increase productivity like never before? Economists have spied such a “New Economy” many times before, of course, and it turned out to be a mirage. Could it be that our own economic miracle – both Canada and the U.S. have been enjoying the longest economic growth periods in their histories – will turn out to be just as chimerical? A report in a recent The New Yorker magazine claims this is so and I found it hard to find fault with the author’s line of reasoning. John Cassidy points out that while information technology has had an impact on improving productivity, the scale of the transformation has been exaggerated.

At first glance, the productivity statistics provided by the governments on both sides of the border, seem impressive enough. But dig a little deeper and the numbers look suspect. The economy’s productivity is calculated by tallying the value of the final goods and services produced – the gross domestic product – and dividing the figure by the total number of hours worked in the business sector. If output grows faster than hours worked, productivity rises. But Cassidy points out that both of the variables that make up the productivity equation are being misrepresented.

According to the federal governments in the U.S. and Canada, the workweek has barely changed in a decade. But that seems awfully hard to believe, particularly as it applies to the vast majority of the workforce that works in the service sector. Most of us working in this sector are not paid on an hourly basis; we receive an annual salary or commission. What the proliferation of technology such as laptops and cell phones has meant is that we can continue working in a lot of other places besides the office. The resulting reality is no one really knows how much work time the majority of workers are putting in. And if millions of work hours are going unrecorded in government statistics it also follows that productivity numbers are biased upward.

Cassidy also points to some funny accounting on the output side. The firms that produce information technology, such as Dell or Compaq, rather than those that use information technology, are the ones posting the most impressive productivity gains. While that’s a nugget interesting enough on its own, Cassidy also reveals that in the U.S. (I don’t know if it’s the same in Canada) the way government values the output of the computer industry has a questionable impact on productivity statistics. The government uses a controversial technique called “hedonic pricing”, which adjusts the raw figures for technology sales to take into account that computers are constantly improving in power and quality. The logic behind this is that quality improvements are worth something which should be included in official statistics even if it’s not reflected in a good’s price. As Cassidy describes it, it’s as if the government decided that because bread is more nourishing than it used to be, every two loaves a baker bakes should be counted as three. It makes the concept of “output” very slippery.

And it makes you wonder about the reality, and vulnerability, of our “economic miracle.”-

Lou Smyrlis
Editor
lsmyrlis@corporate. southam.ca