December 26, 2002
The Slow Countries: US productivity keeps growing - right through the bust. So what's wrong with Europe?

From Wired, December 2002


The Slow Countries

US productivity keeps growing ? right through the bust. So what?s wrong with Europe?

By Bradford DeLong

Is it something in the water? Is there some kind of high tech fluoridation that makes equipment work better in Palo Alto, Austin, or Cambridge (Massachusetts) than in Edinburgh, Cologne, or Cambridge (England)?

Of course, things have broken down on both sides of the Atlantic. The Nasdaq is down nearly three-quarters since its early 2000 high. But Germany?s counterpart ? the Neuer Markt, started with great fanfare near the peak of the Internet bubble ? is virtually dead and will formally shut down next year. It has lost not a measly 75 percent but 96 percent of its value since opening. Listed companies used to be worth 440 billion euros. Now they are worth 20 billion. Launched to unleash the new spirit of Europe?s next-gen entrepreneurs, the Neuer Markt instead equaled ? if not surpassed ? the US dotcom weakness for dodgy business models, fraudulent accounting, and shady executives. To today?s average European investor, ?high tech? now means not the promise of economic heat and light but only smoke and mirrors.

By contrast, while the Nasdaq is still coming out of rehab, there is no doubt that both businesses and consumers are finding the products of US tech industries very useful.

In fact, the American productivity boom has continued throughout the recent recession. Over the past seven quarters, the US unemployment rate has risen 1.8 percent. In every previous recession, such a large rise has been accompanied by falling real GDP. But the past seven quarters have seen real GDP rise 3.1 percent. Even in a full-fledged unemployment recession, with the number of jobless growing by half, production keeps rising because US productivity growth is so strong: The official rate for 2002 could hit 5 percent.

But in Europe? Last year, real GDP grew only 1.5 percent, even though the average unemployment rate fell 0.8 percentage points and total hours grew 1.4 percent ? that?s a zero on labor productivity. This year, western Europe?s real GDP will grow less than 1 percent, and unemployment will rise by half a point. Europe?s productivity grew faster than America?s from the end of World War II until 1995. Since then, the growth has been remarkably slow.

Turns out the productivity gap is due to wholesale and retail trade, financial transactions, and other service industries that intensively use information and communications technology. Measured American labor productivity growth in these sectors accelerated from 1.6 to 4.8 percent per year between the early and the late ?90s, while European productivity growth in ICT-using services remained stuck at a paltry 0.8 percent. Applying this technology to distribution drove US companies like Wal-Mart,, and Lands? End to lead our productivity revolution. It?s not that the rest of the computer-intensive American economy is doing badly: Productivity acceleration in ICT-producing manufacturing has grown even faster, and the evidence in ICT-using manufacturing is clear as well. The big difference between the US and Europe is that the US has been using ICT to improve service sector productivity, and western Europe has not.

Why not? The Federal Reserve and the IMF think that businesses invest heavily in high tech only when they smell immediate productivity gains from reorganization and restructuring; meanwhile, European red tape and high taxes keep service sector firms from trying to reorganize and restructure. The remnants of the lost tribe of Keynesians argue that businesses will invest heavily in tech only when demand is high, and that Europe?s central bankers (in sharp contrast to Alan Greenspan) have been unwilling to risk even a little more inflation. Others claim that the difference between American and European statistical systems creates the illusion of a difference in growth ? that actually Europe is doing fine. Still others say that the US boom was a fraud.

Continued productivity growth says the US boom wasn?t bogus. There are differences between our statistical systems, but they aren?t important enough to account for the difference. And if Europe is doing fine, why is the Neuer Markt shutting down?


A decade ago, people worried about a US productivity paradox, lamenting that computers were everywhere but in the statistics. The answer was that although we could hear the engine coming, the train had not yet reached the station. Much of Europe may be in the same situation today, simply waiting for the next turn of the business cycle and the continued diffusion of technology to achieve critical mass. Finland, Sweden, Ireland, and a few other countries are no longer waiting.

Or maybe it?s worse: There really is something in the water.

Contact J. Bradford DeLong at

Posted by DeLong at December 26, 2002 01:16 PM | Trackback

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