Discussion of Bosworth-Triplett on Transportation and Communication

1. Discussion of Bosworth-Triplett on Transportation and Communication Robert J. Gordon Northwestern University and NBER Brookings Workshop on Productivity in Services Industries: Trends and Measurement Issues, November 21, 2003

2. What the Authors Achieve in These Two Papers • Extremely Clear and Valuable Explanation of BEA and BLS Measurement Methods • BEA vs. BLS Coverage Differences Tied to SIC Codes • Table 4 for Trucking Excellent, Underlines Complexity • Table 5 for Airlines Likewise • Discontinuities in Methods, Coverage, Deflation • Whatever said later about Gordon (1992), B-T do the BLS vs. BEA comparison MUCH better • Uniform Comparison of Labor Productivity Growth Rates, BEA GO, BEA VA, BLS

3. Beyond Accounting for BEA vs. BLS, focus on BEA MFP Growth • Uniform format to Link Labor Productivity to MFP • Contribution of Capital per Worker • Contribution of Intermediate Inputs • Good Job of Highlighting Surprising Results, e.g., • Disappearance of MFP Growth for Airlines • Unbelievably rapid productivity decline for Radio-TV

4. Losing the Forest for the Trees • B-T Papers (both Transportation and Communication) • More Serious in the Transportation Paper • Lose Sight of the Role of Purchased Capital in Creating Productivity Growth • They Use BEA data on Purchased Materials as if they were fact rather than Measurement Error • B-T produce the best evidence yet that BEA VA vs. Intermediate is a fraud

5. My Discussant’s Perspective • Point of Departure, my parallel paper on Transportation in the Griliches CRIW Volume (50 printed pages) • (First reaction: B-T papers are too short, esp. Communications!) • Natural Questions Arise • Are Current Data for 1977-87 Overlap the Same? • Substantive Changes in Productivity Behavior since 1987? • Balance between Measurement and Substantive Analysis • We come back to Substance, no time for other

6. I’ve Got Three Main Points, Here’s Big Point #1 • Why Should We Expect Any MFP Growth in Transportation? • Why Should We Surprised if Measured MFP Growth Accelerates or Decelerates? • The Transportation Industry buys Big Boxes and Engines to Propel the Boxes • Then It Puts Stuff Inside the Boxes • Transportation Industry does no R&D, it’s all done by the makers of the Big Boxes • GE Locomotives and Aircraft Engines • Boeing Aircraft • Cummins, Detroit Diesel truck engines

7. Thus the MFP Action for Transportation Must Reflect the Quality of the Boxes and Engines • MFP Changes Hide Errors in the Price Indexes for Capital Inputs in Transportation • Simplest Example: Airlines • The History of MFP Growth in Airlines reflects unmeasured quality change in the boxes and engines • Especially the transition to Jets

8. What is the Evidence? • Rapid Measured MFP Growth in Airlines reflects unmeasured quality growth in airline capital prior to 1977 • Labor productivity growth reflects changing growth in aircraft quality, DIMINISHING RETURNS • 1935-69 7.1% • 1969-78 5.7% • 1978-87 3.8% (B-T 3.6% Table 2) • B-T 1987-2001 BEA GO 0.1%

9. But What About Those Obvious Productivity Improvements? • Airlines have cut back on the use of purchased inputs (travel agents), and own-employees (res agents, CTOs) • Yet every innovation that allows airlines to cut back on its own employees comes from a supplier of capital goods • Web developers • Kinetics, one of the companies that develops e-check-in kiosks

10. Overall Conclusion on B-T Treatment of Airlines • They Miss Entirely the Role of Diminishing Returns in the Growth of Capital Quality • Diminishing returns in capital quality have Reduced the Growth of Labor Productivity and MFP • Subtlety: Since 1980 Most Quality Improvements in Capital Take the Form of Better Fuel Economy and Longer Range (relevant only for international aviation) • This All Should Come Out in Price Indexes for Aircraft, but B-T don’t discuss this at all

11. Beyond Airlines, What Role Does Capital Play? • Trucking • Capital is the entire ball game • Three types of capital improvements • Size and fuel economy of engines • Minor role of IT capital discussed by B-T • But overwhelmingly the most important role of capital input was . . . • GOVERNMENT-FINANCED HIGHWAY CAPITAL!! • Long-live Barbara’s Highway Capital! • Explicitly taken into account in MFP calculations for airlines and trucking in Gordon (1992), not mentioned in B-T (2003)

12. What’s Left Besides Buying Capital? • Transportation companies face a tradeoff between “improving service” and “improving productivity” • Shorter check-in queues or faster baggage delivery requires • More Employees • More or better capital (e.g., baggage scanners)

13. Second Big Conclusion, B-T don’t heed their own advice • The BEA Gross Output Series Should be used in all Analyses of Industry Productivity • The BEA Value-added series are fatally flawed • This means that none of the B-T tables should list either: • Labor Productivity based on VA • Contribution of Intermediate Materials • MFP based on VA

14. How Can I Reach Such an Extreme Negative Conclusion on VA? • Refer to B-T communications paper p. 5 • “capital-type income reported to IRS on a company basis” • “Assignment of incomes requires a conversion to establishment basis” • “No good ways to make the conversion” • “Likely to be significant inconsistencies between estimates of value added and gross output”

15. The Killer Evidence • Look at B-T Communications Paper, Figure 1 • No resemblance BEA purchased input shares to Census input share • Census Share is Very Stable • My Conclusion – all these tables should be redone to assume a near-constant materials share • Get your white-out and cut out two lines in B-T Tables – “contribution of intermediate” and “MFP based on VA”

16. More Killer Evidence that We Should Bury the BEA VA Program • Look at Airlines, B-T Transportation Paper Table 2 • What is the Contribution of Intermediate Inputs? • 1977-87 per year +2.5% • 1987-95 per year -2.3% • How Could Price-Deflated Intermediate Inputs Increase 25%, then Decline 19%??

17. Before Leaving Airlines • The B-T paper contains offhand comments about changes in airline output quality • Fully treated in Gordon (1992) • Increased seating density occurred 1975-1982 • No comments on • Value of frequent-flyer awards • Narrowbody TV, e-kiosks, web booking

18. How I Remember the Iraq War Mark I (Jan-Feb 1991)!! • Really Annoyed by Critics who Said Deregulation required people to connect by circuitous routes • Watched CNN, started counting • Did a complete count of the entire US airline network, 1978 vs. 1989, routes and frequencies • Concluded a huge increase in quality, many more new routes than dropped routes

19. Conclusion #3: BEA Backwardation • BEA’s huge advance in benchmark revision of industry data, dated January 1991 • Forced me to redo my entire paper midstream between May 1990 conference and 1992 publication • Changed from output indexes based on flawed deflators (noted by B-T) to volume-based indexes • B-T tell us as of 1992 BEA has moved backwards to flawed PPIs (see B-T Transportation Fig 3)

20. B-T Are on Top of Conclusion #3, they just bury and dismiss it • Look at B-T Treatment of Railroads in Transportation Paper • The B-T discussion of railroad output includes an excellent criticism of the BEA use of the flawed PPI • Long live the discrepancies between the BLS productivity program and the BEA – at least the BLS eschews use of its own flawed PPI!

21. Railroads, What Are the Issues? • Shift in the Composition of Output? • Stark Comparison • Boxcars of flight by unemployed in the 1930s • Cattlecars of the holocaust • Vs. today’s specialized larger cars for coal, grain • Union Pacific TV Commericals • Containers are a form of outsourcing

22. Small Comments on Communications • Analogy to Transportation: Almost all the productivity growth is being produced by purchased capital input • Just as there was no discussion of deflators for capital input in transportation, no discussion of deflators for capital input in broadcasting • Good discussion and use of best recent research on deflators for communications capital

23. Caution regarding Broadcast Productivity • My Back Yard • Huge Investment in late 1990s in Extending Digital Cable that “last mile” • Is that properly decomposed into current expense and capital expense • I am paying huge monthly cable bills that are eventually going to amortize that investment ($100 + $40)

24. Their Disappointing Conclusion • We need (Trans, p. 22) “closer integration of the two agencies’ work on industry-level output and productivity.” • How about an alternative verdict? • We need to have BEA abandon the current methodology of its value-added program • We should prohibit BEA from using PPI deflators where an alternative volume-based is available

25. The Final Broad Perspective vs. Where We were in 1992? • Compared to that 1992 paper, are we better off? • This paper contains critical indictments of BEA measurement methods but buries them rather than highlighting them • Flawed VA-materials decomposition • Flawed reliance on PPIs instead of volume • Paper’s lack of overall recognition that productivity gains in these industries come from purchased capital, not own-innovations