ABR: The Measurement of 20th Century U. S. Economic Growth

Northwestern University, Evanston IL

Investigators

Abstract

During the twentieth century the U. S. economy experienced sharp accelerations and decelerations in the growth of multi-factor productivity (MFP) over medium-term intervals. This pattern of acceleration, deceleration, and reacceleration has been the point of departure for numerous hypotheses about the sources of growth earlier in the century, about the post-1972 productivity growth slowdown, and about the post-1995 productivity growth revival. This project aims to carry out measurement projects that question the magnitude and timing of long-term changes in MFP growth in the U. S. since the late nineteenth century. There are two separate parts to the research plan. (1) Standard MFP data prior to World War II are not consistent with official postwar government series, have not been adjusted for the changing quality of inputs, and require further adjustment for problems in the measurement of capital input. (2) In what the investigator called the "Hulten-Bruegel Paradox," a factual inconsistency plagues any attempt to extrapolate backward an upward price index bias of the magnitude reported by the 1996 Boskin commission. Such backward extrapolation implies implausibly low levels of real consumption if one goes back far enough, e.g., two centuries. The paradox raises the possibility that for some time intervals, price indexes for major products may have had a zero or even downward bias. Research on topic (1) has now been completed with striking conclusions. New measures of MFP show much less of a peak in growth during 1928-50, the period of rapid growth extends back further to 1891, and the puzzling previous behavior of the output-capital ratio is resolved. The main emphasis in the project now turns to price measurement. Bias in government price indexes is normally assumed to be upward, that is, overstating inflation. The novelty in this project is to explore the possibility that inflation may have been understated (or overstated by substantially less) in earlier decades. This possibility, which has not heretofore been systematically investigated, implies that MFP growth may have been overstated in the golden era when measured productivity growth was rapid. Shelter services (both rent and homeownership) are the central focus of the proposed research, the aim of which is to develop new indexes of price and quality change for shelter over the full period from World War I to date. Several sources of data have been uncovered that suggest that the official CPI for residential rent, which is the basis for the deflation of home ownership in the national income accounts, may substantially understate inflation in quality-adjusted rents, particularly between 1925 and 1975. A useful byproduct of the research on the quality of residential shelter will be to provide new information to reassess the puzzle of negative productivity growth in the construction industry over the past three decades. The proposal also provides evidence that the CPI may understate the historic inflation rate for apparel, another important component of consumer expenditure. Comparisons of average prices paid and hedonic indexes with matched-model indexes from the same data source suggest the possibility of a much more rapid rate of apparel inflation than in the matched-model indexes or in the CPI.