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Another McKinsey Quarterly article on productivity argues that six sectors accounted for the acceleration in productivity growth in the late 1990's.

managerial and technological innovations in only six highly competitive industries--wholesale trade, retail trade, securities, semiconductors, computer manufacturing, and telecommunication--were the most important causes

The authors do not believe that increased spending on information technology is what accounts for the productivity increases. They point out that some other industries--notably hotels, long distance telephony, and retail banking--made large investments in computers and communications but nonetheless showed little productivity gain.

the most important cause of the productivity acceleration after 1995 was fundamental changes in the way companies deliver products and services...high or increasing competitive intensity was essential to the spread of innovation

Discussion Question. If competitive instensity is a key determinant of productivity growth, should public policy be striving to increase competitive intensity in certain fields, such as education?

Two recent articles point to ways in which real economic progress is not necessarily chic. An article in McKinsey Quarterly (requires free registration) says,

retail-productivity growth, as measured by real value added per hour, jumped from 2 percent (1987-95) to 6.3 percent (1995-99), explaining nearly one-quarter of the economy-wide acceleration in productivity...

More than half of the productivity acceleration in the retailing of general merchandise can be explained by only two syllables: Wal-Mart. In 1987, Wal-Mart had a market share of just 9 percent but was 40 percent more productive than its competitors...By 1995, it commanded a market share of 27 percent and had widened its productivity edge to 48 percent.

Jakob Nielsen walks through a litany of examples of ways that companies try to compete on price or buzz when in fact there are opportunities to compete with better software.

If this user spends 20% of his or her time reading...on the computer screen, then the screen costs the company $20,000 per year...ClearType will make this user at least 10% more productive while reading from the screen, for a gain of $2,000...

Websites are so difficult to use that almost any company can differentiate itself through a relatively small investment in usability and programming.

...Today, a good support area on a vendor's website is worth more than an army of blue-suited service techs.

Discussion Question. When a consumer is ready to choose a product, the consumer may not have complete information to compare the usability of two different brands. How does this affect the producer's incentive to compete on price vs. usability?

Amtrak is trying to railroad Congress into appropriating $1.2 billion in subsidy funding.

an appropriation below this level will require the elimination of unprofitable long-distance service as early as October 1, 2002.

Discussion Question. What is the public policy purpose in subsidizing long-distance train travel?

Are you fed up with the stupidity of the airport security system? This Washington Post story offers hope for a more effective screening process.

subtle patterns identified by computer programs...would contribute to a threat index or score for every passenger. Passengers with higher scores would be singled out for additional screening by authorities.

This drew immediate and predictable reaction from various gadflies and activists. I posted an essay about these Privacy Luddites.

Morgan Stanley's Dick Berner says that the weak stock market has increased personal saving and restrained consumer spending.

Don't look now, but the "wealth effect" is at work in reverse, pulling down spending growth.. We estimate that the stock market decline trimmed about 1 1/4 percentage points from spending growth (year on year) in 2001 alone.

Berner cites a paper written last April by Federal Reserve economists Dean Maki and Michael Palumbo on the behavior of the wealthiest households.

We show that the groups of families whose portfolios were boosted the most by the exceptional stock market performance over the latter half of the 1990s are the same groups whose net saving flows fell the sharpest from 1995 through 2000.

Discussion Question. According to the study, the top quintile accounts for 80 percent of wealth but less than 50 percent of spending. What does this say about their saving behavior compared to the rest of the population?

Data on unemployment for January were released today. I think that the process that generates changes in the unemployment rate is poorly understood. The overall change in employment and unemployment is a small net amount relative to massive movements in the labor market.

Federal Reserve economists Bruce C. Fallick and Charles A. Fleischman, in a paper written last April, point out that

about 5.2 million workers per month in 1999, moved from employment to nonemployment (that is, unemployment plus not in the labor force) in an average month, and a slightly higher number moved from unemployment to employment.

Moreover, Fallick and Fleischman point out, about 4 million workers per month change employers. Overall, therefore, about nine million employment relationships end each month, and about nine million employment relationships start each month. The difference between those two numbers is the change in aggregate employment, where a movement of 300,000 in a month is considered large.

In other words, we have a strong economic month when 9 million jobs are terminated and 9.3 million new jobs are started. We have a weak economic month when 9 million jobs are terminated and 8.7 million new jobs are started.

Discussion Question. In view of this data, can one view reports of layoffs as a reliable indicator of changes in overall employment? If you read about a layoff, can you assume that the unemployment rate will rise?

The Economist does a nice job of explaining a new study by Elroy Dimson, Paul Marsh, and Michael Staunton of an old issue: are stocks a better investment than bonds over the long run? The answer is, "yes."

In every country in their study, the authors show that real (that is, inflation-adjusted) returns from equities beat bonds.

The implication of this sort of research is that you should buy and hold stocks, rather than trying to time the market. Even when stock prices appear to be "high," it is a good time to buy.

I myself cannot resist market timing. These days, I am prepared to add to my portfolio of U.S. stocks whenever the Dow falls below 9000, and I am prepared to reduce my holdings whenever the Dow goes above 11,000. In between, I stand pat, at a relatively low level of stock market investments.

I know that the research tells me that I am wrong to try to time the market. My "timing" strategy leads me to have too little of my portfolio in the market on average, and I can see where my wealth is lower than it would have been had I just bought and held all along. But as convincing as the research seems to be, I cannot make the move to buy and hold.

Discussion Question

So-called behavioral economists emphasize the irrational components in human behavior. Am I an "exhibit A" for behavioral economics?

In her profile of Brock Lindsey, Virginia Postrel says,

The Asian model of state-directed industrial policy depended on insulating investment decisions from normal considerations of profit and loss. Hence the importance of banks, as opposed to public capital markets. Banks are less transparent and easier to control.

There are those who complain about the fact that the United States stock market made Enron possible. However, Postrel and Lindsey imply that the bank-dependent financial systems in Asia and elsewhere are much worse than our public capital markets. So far, financial coverups in the United States appear to be limited to a few companies. In other countries, where banks are dominant, virtually the entire financial system has been swallowed up by bad investments that managers refused to acknowledge.

Hal Plotkin argues that the Internet search process has been corrupted by paid listings. He takes particular umbrage at Yahoo's fee for expedited review of site submissions.

It's a move worth noting, because respectable media outlets traditionally get their money from advertisers and/or subscribers rather than from their subjects.

I disagree. The American Economic Review is a respectable media outlet, but you have to pay a fee to submit an article there, to defray the cost of having the article refereed.

Discussion Question. If you discovered that a search engine which was giving you useful results in fact was presenting you with paid links, would you switch to a different search engine?

At this year's Davos meeting (held in New York, not Davos), Brad DeLong ponders the state of balance between government and the private sector.

too much of what is needed for a modern economy to run are "public" goods that an unfettered government-free market simply will not provide, too many disputes over who owns what and what exactly are contractual obligations must be refereed by something--and that something is the government--and there is no guarantee that the market distribution of income will be politically acceptable unless the government puts its large thumb on the scale.

Discussion Question. If today's environment is suited to more government involvement in the economy, then why does the United States seem to be better positioned than Japan or most European countries?