At Friday's annual meeting of the American Economic Association in Washington, a panel of prominent economists examined the business outlook and concluded that U.S. productivity growth will slow and that the economy itself is unlikely to regain the fast growth rates of the late 1990s.
Harvard University professor Dale Jorgenson said, with the collapse of the high tech bubble in the stock market, the U.S. economy is reverting to the slower growth rates of the period 1973 to 1995. In the boom years from 1995 to 2000, the U.S. economy grew by about five percent annually. That high growth, said Professor Jorgenson, was fueled by enormous gains in productivity that are unlikely to return. "So, 2.78 is the figure going forward for about the next decade," he said. "In other words, we're not going to have an acceleration of economic growth, contrary to what Alan Greenspan [central bank governor] may say in his testimony to the Senate Banking Committee only two weeks from today. That's not going to happen. It is something totally outside the range of possibilities, even under the most optimistic assessment of productivity and capital deepening."
The extraordinary U.S. gains in productivity in the mid-1990s, said Professor Jorgenson, were due entirely to investments in information technology that will not be replicated in the future.
Another economist on the panel, Robert Gordon of Northwestern University (near Chicago), agrees that the boom in high-tech capital investment is over. That boom, particularly in telecommunications, evolved into a speculative bubble in which companies built huge over-capacity in fiber optic networks, most of which is still unused.
Another reason the investment boom will not return, said Professor Gordon, is that computer software innovation now lags hardware innovation. "[Computer] users were continually under pressure to replace obsolescent machines capable of keeping up with software improvements," said Robert Gordon. "As the saying went, what Intel [hardware] giveth Microsoft [software] taketh away. Well, this race is over. Intel has won and Microsoft is lagging badly behind."
This panel of the best and the brightest in the American economics profession drew a standing room only audience of over 1,000. But as another panelist, Harvard University president Larry Summers observed, the economics profession has a bad record in forecasting. He recalled that in 1960 it was widely assumed that by 1985 the Soviet Union would overtake the United States in per capita income. Similarly, said the former U.S. treasury secretary, in 1989 it was assumed that Japan's dominance in high technology manufacturing and rapid growth was unassailable. Of course, the Soviet Union no longer exists and the Japanese economy is in mired in a fourth consecutive year of deflation and stagnation.