%Slides to be used by Ed in several talks, Spring 2012 \magnification=2400 \input epsf \input /home/erm/tex/hoover \input /home/erm/tex/color.txs \def\boxit#1{\vbox{\hrule\hbox{\vrule\kern3pt \vbox{\kern3pt#1\vskip 3pt\kern3pt}\kern3pt\vrule}\hrule}} \hsize=9.25truein \vsize=6.75truein \hoffset=1.truein %\hoffset=.4truein \voffset=-.40truein %\voffset=-.1truein \baselineskip=15pt \def\no{\noindent} \def\bul{$\bullet$} \def\cir{$\circ$} \def\newpage{\vfill\eject} \def\widehrulefill{\hfill} \overfullrule=0pt \font\smcaps=cmcsc10 \font\ftitlea=cmcsc11 \font\ftitleb=cmcsc11 \font\ftitlec=cmcsc10 \font\ftitled=cmcsc8 \nopagenumbers \newpage \headline={\hskip -1.25truein\def\epsfsize#1#2{0.16#1}\epsffile{/home/erm/tex/logo.eps}\hfill} \centerline{\ } \vskip .5truein \centerline{\hskip -1.15truein\ftitleb The Labor Productivity Puzzle} \bigskip \centerline{\hskip -1.15truein\ftitled Ellen R.~McGrattan and Edward C.~Prescott} \medskip \centerline{\hskip -1.15truein\ftitled March 2012} \bigskip \bigskip \bigskip \bigskip \bigskip \centerline{\hskip -1.15truein{\ftitled Working Paper 694}, \colorit{Blue}{www.minneapolisfed.org{\tt/}research}} \newpage \footline={\hfill\hss\sixrm\folio\hss} \pageno=1 \centerline{\ } \vskip -20pt \line{\smcaps\ \ The Labor Productivity Puzzle \widehrulefill} \bigskip \medskip \item{\bul} Pre-1985, correlation between GDP and GDP/hour high \bigskip \item{\bul} Post-1985, correlation has been near zero \bigskip \def\epsfsize#1#2{0.22#1} \no{\hskip 1truein\epsffile{blank.eps} \newpage \footline={\hfill\hss\sixrm\folio\hss} \pageno=1 \centerline{\ } \vskip -20pt \line{\smcaps\ \ The Labor Productivity Puzzle \widehrulefill} \bigskip \medskip \item{\bul} Pre-1985, correlation between GDP and GDP/hour high \bigskip \item{\bul} Post-1985, correlation has been near zero \bigskip \def\epsfsize#1#2{0.22#1} \no{\hskip .75truein\epsffile{sfig1A.eps}} \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ The Labor Productivity Puzzle \widehrulefill} \bigskip \medskip \item{\bul} Pre-1985, correlation between GDP and GDP/hour high \bigskip \item{\bul} Post-1985, correlation has been near zero \bigskip \def\epsfsize#1#2{0.22#1} \no{\hskip .75truein\epsffile{sfig1A.eps}\hskip 0truein \vbox to 3.25truein{{\hbox to 3.truein{\sl Viewed as puzzle\hfill}} {\hbox to 3.truein{\sl for RBC theory\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Recent Recession of 2008--2009\ \widehrulefill} \bigskip \medskip \item{\bul} GDP fell below trend in 2008, stayed low \bigskip \item{\bul} Productivity rose above trend, stayed high \bigskip \def\epsfsize#1#2{0.22#1} \no{\hskip .75truein\epsffile{sfig3and5.eps}} \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Recent Recession of 2008--2009\ \widehrulefill} \bigskip \medskip \item{\bul} GDP fell below trend in 2008, stayed low \bigskip \item{\bul} Productivity rose above trend, stayed high \bigskip \def\epsfsize#1#2{0.22#1} \no{\hskip .75truein\epsffile{sfig3and5.eps}\hskip 0truein \vbox to 3.25truein{{\hbox to 3.truein{\sl Viewed as puzzle\hfill}} {\hbox to 3.truein{\sl for RBC theory\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Puzzle for RBC Theory\ \widehrulefill} \bigskip \bigskip \item{\bul} If TFP shocks driving aggregate fluctuations \bigskip \medskip \itemitem{\cir} Productivity is low during recessions \bigskip \medskip \itemitem{\cir} Output is even lower \bigskip \medskip \item{\bul} Because both TFP and factor inputs fall \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ This Paper\ \widehrulefill} \bigskip \bigskip \item{\bul} Applies McGrattan and Prescott's RBC theory with \bigskip \medskip \itemitem{\cir} Intangible investment that is expensed \bigskip \medskip \itemitem{\cir} Nonneutral technology change w.r.t.~its production \bigskip \bigskip \item{\bul} Finds recent events not puzzling in light of theory \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ The Theory\ \widehrulefill} \bigskip \bigskip \item{\bul} Originally developed to reconcile puzzling 1990's boom \bigskip \itemitem{\cir} Economic theories predicted a depressed economy \bigskip \itemitem{\cir} But US economy --- especially hours --- boomed \bigskip \medskip \item{\bul} Recent events are like 1990s period in reverse \bigskip \itemitem{\cir} Hours are depressed \bigskip \itemitem{\cir} Productivity is high \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Why No Puzzle?\ \widehrulefill} \bigskip \bigskip \item{\bul} GDP excludes most intangible investment \medskip \itemitem{\cir} Corporations expense R\&D, advertising from profits \medskip \itemitem{\cir} Business owners expense time building their businesses \bigskip \item{\bul} If intangible investment falls by more than GDP \medskip \itemitem{\cir} True output falls by more than GDP \medskip \itemitem{\cir} True productivity falls by more than GDP/hour \bigskip \item{$\Rightarrow$} Observations not puzzling \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea RBC Theory Circa 2012} \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Model \ \widehrulefill} \bigskip \bigskip \item{\bul} Household/Business owners solve $$ \max E \sum_{t=0}^\infty \beta^t [\log c_t+\psi \log(1 -h_t)]N_t $$ \item{} subject to $$\eqalign{ &c_t + x_{\scriptscriptstyle{T}t} + q_t x_{\scriptscriptstyle{I}t} = r_{\scriptscriptstyle{T}t} k_{\scriptscriptstyle{T}t} +r_{\scriptscriptstyle{I}t} k_{\scriptscriptstyle{I}t}+w_t h_t \cr &\qquad\qquad -\!{\rm taxes}_t\!+\!{\rm transfers}_t\!+\!{\rm nonbusiness}_t\cr &k_{\scriptscriptstyle{T},t+1} = (1-\delta_{\scriptscriptstyle T}) k_{\scriptscriptstyle{T}t} + x_{\scriptscriptstyle{T}t}\cr &k_{\scriptscriptstyle{I},t+1} = (1-\delta_{\scriptscriptstyle I}) k_{\scriptscriptstyle{I}t} + x_{\scriptscriptstyle{I}t}\cr } $$ \bigskip \item{} where subscript $T/I$ denotes tangible/intangible \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Technology\ \widehrulefill} \bigskip \bigskip \item{\bul} Production of final goods and services $$y_b=A^1 F(k^1_{\scriptscriptstyle T},k_{\scriptscriptstyle I},h^1)$$ \bigskip \item{\bul} Production of new intangible capital $$x_{\scriptscriptstyle I} =A^2 G(k^2_{\scriptscriptstyle T},k_{\scriptscriptstyle I},h^2)$$ \bigskip \bigskip \item{} {\it Total} intangible stock used in two activities \newpage \centerline{\ } \vskip -20pt \line{\smcaps\ \ Two Types of Intangible Investment\ \widehrulefill} \bigskip \bigskip \medskip \item{\bul} Expensed: capital owners finance $\chi$ with reduced profits \bigskip \bigskip \item{\bul} Sweat: worker owners finance $1\!-\!\chi$ with reduced wages \bigskip \bigskip \medskip \item{} Choice of $\chi$ has tax implications \bye \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Evidence of Increased Intangible Investment} \vskip 10pt \centerline{\hskip -.5truein \ftitlea ---At the Macro Level---} % comp./(dgdp.*grate.*pcps.*hcps) and hcps, 1990=1. \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hours Boomed But Compensation Per Hour Fell\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{sFigure3.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Would expect\hfill}} {\hbox to 3truein{\sl high labor\hfill }} {\hbox to 3truein{\sl productivity\hfill}} {\hbox to 3truein{\sl and per-hour\hfill}} {\hbox to 3truein{\sl compensation\hfill}} {\hbox to 3truein{\sl in the boom\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hours Boomed But Compensation Per Hour Fell\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{sFigure3.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl ..... unless\hfill}} {\hbox to 3truein{\sl business owners\hfill }} {\hbox to 3truein{\sl expense their\hfill}} {\hbox to 3truein{\sl ``sweat equity''\hfill}} }} % prof./(dgdp.*grate.*pcps) and gdp./(dgdp.*grate.*pcps), 1990=1 \newpage \centerline{\ } \vskip -20pt \line{\smcaps GDP Rose But Profits Fell\ \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{sFigure4.eps}\hskip .25truein \vbox to 4.5truein{{\hbox to 3truein{\sl Would expect\hfill}} {\hbox to 3truein{\sl high profits\hfill }} {\hbox to 3truein{\sl in the boom\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps GDP Rose But Profits Fell\ \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{sFigure4.eps}\hskip .25truein \vbox to 4.5truein{{\hbox to 3truein{\sl ..... unless\hfill}} {\hbox to 3truein{\sl companies\hfill }} {\hbox to 3truein{\sl do more R\&D\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Capital Gains High at End of 90s\ \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{Gains.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Would expect \hfill}} {\hbox to 3truein{\sl no significant\hfill }} {\hbox to 3truein{\sl break in capital\hfill }} {\hbox to 3truein{\sl gains series\hfill }} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Capital Gains High at End of 90s\ \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{Gains_90s.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Would expect \hfill}} {\hbox to 3truein{\sl no significant\hfill }} {\hbox to 3truein{\sl break in capital\hfill }} {\hbox to 3truein{\sl gains series\hfill }} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Capital Gains High at End of 90s\ \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.30#1} \no{\hskip -.5truein\epsffile{Gains_90s.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl ..... unless \hfill}} {\hbox to 3truein{\sl some corporate\hfill }} {\hbox to 3truein{\sl investment is \hfill }} {\hbox to 3truein{\sl abnormally high \hfill }} }} \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Evidence of Increased Intangible Investment} \vskip 10pt \centerline{\hskip -.5truein \ftitlea ---At the Micro Level---} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Total Industry R\&D Boomed\ \widehrulefill} \bigskip \bigskip \item{\bul} Between 1994 and 2000, nominal \bigskip \bigskip \itemitem{\cir} Spending for industry R\&D increased 68 percent \bigskip \itemitem{\cir} GDP increased 39 percent \bigskip \bigskip \item{\bul} R\&D is expensed by corporations, lowering profits \newpage \centerline{\ } \vskip -20pt \line{\smcaps IPO Gross Proceeds Boomed\ \widehrulefill} \bigskip \bigskip \item{\bul} Gross proceeds of IPOS averaged \bigskip \bigskip \itemitem{\cir} \$8.2 billion over 1980--1989 \bigskip \itemitem{\cir} \$30.9 billion over 1990--1999 \bigskip \bigskip \item{\bul} Some forgo compensation and get paid later with IPO \newpage \centerline{\ } \vskip -20pt \line{\smcaps Average Hours Boomed Selectively \ \widehrulefill} \bigskip \bigskip % in CPS/sweat.out where h=sweat(:,2:5) and t=1992:2002: % [t,h(:,1),h(1,1)*ones(11,1),h(:,1)-h(:,5),(h(1,1)-h(1,5))*ones(11,1)] \centerline{ Hours Per Noninstitutional Population Aged 16-64} \smallskip \centerline{\vbox{\tabskip=0pt\offinterlineskip \def\tablerule{\noalign{\hrule}} \halign to250pt{\tabskip=1em plus2em #&#\hfil& #&\hfil#& #&\hfil#& #\tabskip=0pt\cr \tablerule\cr \noalign{\smallskip} \strut& && \omit\hidewidth Total \hidewidth&& \omit\hidewidth The Educated in\hidewidth&\cr \strut& && \omit\hidewidth (1992=100)\hidewidth&& \omit\hidewidth Select Occupations${}^\dagger$\hidewidth&\cr\tablerule \noalign{\medskip} \strut&\hskip -.5truein 1992&& 100.0&& 10.3&\cr \noalign{\medskip} \strut&\hskip -.5truein 2000&& 106.5&& 13.3&\cr \noalign{\bigskip} \strut&\hskip -.5truein \% Chg.&& 6.5&& 30.0&\cr \tablerule }}} \bigskip \item{}\ \ \ ${}^\dagger$ Managerial, computational, and financial occupations \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Extending Theory to Include Intangible Investment} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Extending Theory to Include Intangible Investment\ \widehrulefill} \bigskip \bigskip \item{\bul} Household/Business owners solve $$ \max E \sum_{t=0}^\infty \beta^t [\log c_t+\psi \log(1 -h_t)]N_t $$ \item{} subject to $$\eqalign{ &c_t + x_{\scriptscriptstyle{T}t} + q_t x_{\scriptscriptstyle{I}t} = r_{\scriptscriptstyle{T}t} k_{\scriptscriptstyle{T}t} +r_{\scriptscriptstyle{I}t} k_{\scriptscriptstyle{I}t}+w_t h_t \cr &\qquad\qquad -\!{\rm taxes}_t\!+\!{\rm transfers}_t\!+\!{\rm nonbusiness}_t\cr &k_{\scriptscriptstyle{T},t+1} = (1-\delta_{\scriptscriptstyle T}) k_{\scriptscriptstyle{T}t} + x_{\scriptscriptstyle{T}t}\cr &k_{\scriptscriptstyle{I},t+1} = (1-\delta_{\scriptscriptstyle I}) k_{\scriptscriptstyle{I}t} + x_{\scriptscriptstyle{I}t}\cr } $$ \bigskip \item{} where subscript $T/I$ denotes tangible/intangible \newpage \centerline{\ } \vskip -20pt \line{\smcaps Technology\ \widehrulefill} \bigskip \bigskip \item{\bul} Production of final goods and services $$y_b=A^1 F(k^1_{\scriptscriptstyle T},k_{\scriptscriptstyle I},h^1)$$ \bigskip \item{\bul} Production of new intangible capital $$x_{\scriptscriptstyle I} =A^2 G(k^2_{\scriptscriptstyle T},k_{\scriptscriptstyle I},h^2)$$ \bigskip \bigskip \item{} {\it Total} intangible stock used in two activities \newpage \centerline{\ } \vskip -20pt \line{\smcaps Two Types of Intangible Investment\ \widehrulefill} \bigskip \bigskip \medskip \item{\bul} Expensed: capital owners finance $\chi$ with reduced profits \bigskip \bigskip \item{\bul} Sweat: worker owners finance $1\!-\!\chi$ with reduced wages \bigskip \bigskip \medskip \item{} Choice of $\chi$ has tax implications \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hypothesis for the 1990s\ \widehrulefill} \bigskip \bigskip \item{\bul} Technological change was nonneutral: $A^2_t/A^1_t \uparrow$ \bigskip \medskip \item{} \bigskip \medskip \item{} \bigskip \medskip \item{} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hypothesis for the 1990s\ \widehrulefill} \bigskip \bigskip \item{\bul} Technological change was nonneutral: $A^2_t/A^1_t \uparrow$ \bigskip \medskip \item{$\Rightarrow$} More hours to intangible sector: $h^2_t/h^1_t \uparrow$ \bigskip \medskip \item{} \bigskip \medskip \item{} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hypothesis for the 1990s\ \widehrulefill} \bigskip \bigskip \item{\bul} Technological change was nonneutral: $A^2_t/A^1_t \uparrow$ \bigskip \medskip \item{$\Rightarrow$} More hours to intangible sector: $h^2_t/h^1_t \uparrow$ \bigskip \medskip \item{$\Rightarrow$} NIPA compensation per hour $w^{NIPA}_t$ falls $$ w^{\scriptscriptstyle NIPA}_t \propto {y_{bt}\over h^1_t+h^2_t}$$ \bigskip \medskip \item{} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Hypothesis for the 1990s\ \widehrulefill} \bigskip \bigskip \item{\bul} Technological change was nonneutral: $A^2_t/A^1_t \uparrow$ \bigskip \medskip \item{$\Rightarrow$} More hours to intangible sector: $h^2_t/h^1_t \uparrow$ \bigskip \medskip \item{$\Rightarrow$} NIPA compensation per hour $w^{NIPA}_t$ falls \bigskip \medskip \item{} While true compensation per hour $w_t$ rises $$ w_t\propto {y_{bt}\over h^1_t}= {y_{bt}+q_t x_{{\scriptscriptstyle I}t} \over h^1_t+h^2_t}$$ \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Quantitative Predictions } \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Quantitative Predictions } \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 1: Identify TFPs} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Identifying TFPs\ \widehrulefill} \bigskip \bigskip \item{\bul} Need inputs and outputs of production \bigskip \bigskip \itemitem{\cir} Split of hours and tangible capital in 2 activities \bigskip \itemitem{\cir} Magnitude of intangible investment and capital \bigskip \bigskip \itemitem{} \bigskip \bigskip \item{} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Identifying TFPs\ \widehrulefill} \bigskip \bigskip \item{\bul} Need inputs and outputs of production \bigskip \bigskip \itemitem{\cir} Split of hours and tangible capital in 2 activities \bigskip \itemitem{\cir} Magnitude of intangible investment and capital \bigskip \bigskip \itemitem{} $\Leftarrow$ Determined by factor price equalization \bigskip \bigskip \item{} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Identifying TFPs\ \widehrulefill} \bigskip \bigskip \item{\bul} Need inputs and outputs of production \bigskip \bigskip \itemitem{\cir} Split of hours and tangible capital in 2 activities \bigskip \itemitem{\cir} Magnitude of intangible investment and capital \bigskip \bigskip \itemitem{} $\Leftarrow$ Determined by factor price equalization \bigskip \bigskip \item{\bul} Only requires observations on NIPA products and CPS hours \newpage \centerline{\ } \vskip -20pt \line{\smcaps Implied TFPs\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure5.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Which are\hfill}} {\hbox to 3truein{\sl very different\hfill}} {\hbox to 3truein{\sl than standard \hfill}} {\hbox to 3truein{\sl TFP measure\hfill }} {\hbox to 3truein{\sl estimated\hfill}} {\hbox to 3truein{\sl for US\hfill}} }} \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Quantitative Predictions } \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 2: Revise Data in Light of Theory} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Starting Point: National Accounts\ \hfil}\hskip -.5truein \bigskip \centerline{\vbox{\tabskip=0pt\offinterlineskip \def\tablerule{\noalign{\hrule}} \def\widetablerule{\noalign{\hrule height1pt}} \def\widehrulefill{\leaders\hrule height1pt\hfill} \halign to300pt{\tabskip=1em plus2em #&#\hfil& \vrule width1pt#&#\hfil& #\tabskip=0pt\cr \strut& \omit\hidewidth NIPA INCOME\hidewidth&\omit& \omit\hidewidth NIPA PRODUCT\hidewidth&\cr\widetablerule \strut& && & \cr \strut& Capital consumption&& Personal consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Taxes on production&& Government consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Compensation \colorit{Blue}{\bf less sweat}&& Government investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Profits \colorit{Blue}{\bf less expensed}&& Private tangible investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Net interest&& Net exports&\cr \strut& && & \cr \strut& \phantom{\colorit{Blue}{\bf Capital gains}}&& \phantom{\colorit{Blue}{\bf Intangible investment}}&\cr }}} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Revised National Accounts\ \hfil}\hskip -.5truein \bigskip \centerline{\vbox{\tabskip=0pt\offinterlineskip \def\tablerule{\noalign{\hrule}} \def\widetablerule{\noalign{\hrule height1pt}} \def\widehrulefill{\leaders\hrule height1pt\hfill} \halign to300pt{\tabskip=1em plus2em #&#\hfil& \vrule width1pt#&#\hfil& #\tabskip=0pt\cr \strut& \omit\hidewidth TOTAL INCOME\hidewidth&\omit& \omit\hidewidth TOTAL PRODUCT\hidewidth&\cr\widetablerule \strut& && & \cr \strut& Capital consumption&& Personal consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Taxes on production&& Government consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Compensation \colorit{Blue}{\bf less sweat}&& Government investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Profits \colorit{Blue}{\bf less expensed}&& Private tangible investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Net interest&& Net exports&\cr \strut& && & \cr \strut& \colorit{Blue}{\bf Capital gains}&& \colorit{Blue}{\bf Intangible investment}&\cr }}} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Revised National Accounts\ \hfil}\hskip -.5truein \bigskip \centerline{\vbox{\tabskip=0pt\offinterlineskip \def\tablerule{\noalign{\hrule}} \def\widetablerule{\noalign{\hrule height1pt}} \def\widehrulefill{\leaders\hrule height1pt\hfill} \halign to300pt{\tabskip=1em plus2em #&#\hfil& \vrule width1pt#&#\hfil& #\tabskip=0pt\cr \strut& \omit\hidewidth TOTAL INCOME\hidewidth&\omit& \omit\hidewidth TOTAL PRODUCT\hidewidth&\cr\widetablerule \strut& && & \cr \strut& Capital consumption&& Personal consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Taxes on production&& Government consumption&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Compensation \phantom{\bf less sweat}&& Government investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Profits \phantom{\bf less expensed}&& Private tangible investment&\cr \strut& && & \cr \noalign{\vskip -.05truein} \strut& Net interest&& Net exports&\cr \strut& && & \cr \strut& && \colorit{Blue}{\bf Intangible investment}&\cr }}} \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Quantitative Predictions } \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 3: Compute equilibria } \newpage \centerline{\ } \vskip -20pt \line{\smcaps Implied Equilibrium Per Capita Hours \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure7.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Predicts large\hfill}} {\hbox to 3truein{\sl increase in hours:\hfill}} {\hbox to 3truein{\sl consistent with US\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Implied Equilibrium Real GDP\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure8.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Predicts below\hfill}} {\hbox to 3truein{\sl trend and then\hfill}} {\hbox to 3truein{\sl above at end \hfill }} {\hbox to 3truein{\sl of 1990s:\hfill }} {\hbox to 3truein{\sl consistent\hfill}} {\hbox to 3truein{\sl with US\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Is Intangible Filling in the Gap?\ \widehrulefill} \bigskip \bigskip \item{\bul} Two critical elements \bigskip \bigskip \itemitem{\cir} Intangible investment that is expensed \bigskip \medskip \itemitem{\cir} Nonneutral technology change w.r.t.~its production \bigskip \bigskip \item{\bul} Adding intangible capital only doesn't resolve puzzle \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Quantitative Predictions } \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 4: Check sensitivity to parameter choices} \vskip 10pt \centerline{\hskip -.5truein \ftitlea (See appendix)} \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Testing the Theory} \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 1: Demonstrate external conformity} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Compare Model and NIPA Compensation\ \widehrulefill} \bigskip \bigskip \item{\bul} Does model yield accurate prediction for compensation? \bigskip \bigskip \item{\bul} To answer, \bigskip \medskip \itemitem{\cir} Put a BEA accountant in model economy \bigskip \medskip \itemitem{\cir} Accountant estimates household's compensation as: $$w_t h_t-(1-\chi)q_tx_{{\scriptscriptstyle I}t}$$ \newpage \centerline{\ } \vskip -20pt \line{\smcaps Business Compensation \ \widehrulefill} \bigskip \bigskip %(ssectcomp+.7*ssectpinc)./(dgdp.*grate.*pcps)/gdp0 %(1-thetb-thetu)*(ybt+qt.*xut)-(1-chis)*qt.*xut \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure9.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Theory and\hfill}} {\hbox to 3truein{\sl data match up\hfill}} {\hbox to 3truein{\sl surprisingly\hfill }} {\hbox to 3truein{\sl well!\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Compare Model and FOF Capital Gains\ \widehrulefill} \bigskip \bigskip \item{\bul} Does model yield accurate prediction for capital gains? \bigskip \bigskip \item{\bul} To answer, \bigskip \medskip \itemitem{\cir} Put a Flow-of-Funds accountant in model economy \bigskip \medskip \itemitem{\cir} Accountant estimates ``holding gains'' \newpage \centerline{\ } \vskip -20pt \line{\smcaps Compare Model and FOF Capital Gains \ \widehrulefill} \bigskip \bigskip \item{\bul} Need change in value of business, $\Delta V_t$, where \medskip $$\eqalign{ V_t &= \underbrace{(1-\tau_{dt}) K_{{\scriptscriptstyle T},t+1}}_{\rm value\ of\ tangible}\cr \noalign{\bigskip} &\qquad +\underbrace{[\chi (1-\tau_{dt})(1-\tau_{pt})+(1-\chi)(1-\tau_{ht})] q_t K_{{\scriptscriptstyle I},t+1}}_{\rm value\ of\ intangible}\cr } $$ \bigskip \bigskip \item{ } which depends on value of intangible stock \newpage \centerline{\ } \vskip -20pt \line{\smcaps U.S.~Non-Real Estate Capital Gains \ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure10.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Both are\hfill }} {\hbox to 3truein{\sl significantly\hfill }} {\hbox to 3truein{\sl higher in\hfill }} {\hbox to 3truein{\sl late 1990s\hfill}} }} \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Testing the Theory} \vskip 10pt \centerline{\hskip -.5truein \ftitlea Step 2: Demonstrate that theory can fail} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Our Theory Can Fail\ \widehrulefill} \bigskip \bigskip \item{\bul} If economy had: \bigskip \itemitem{\cir} No intangible capital \bigskip \itemitem{\cir} Lower labor distortions in the 1990s \bigskip \bigskip \item{\bul} Our theory predicts {\it counterfactually}: \bigskip \itemitem{\cir} A boom in R\&D and other intangible investment \bigskip \itemitem{\cir} A boom in capital gains \bigskip \medskip \item{} but there would be no empirical evidence for either \newpage \centerline{\ } \vskip 2truein \centerline{\hskip -.5truein \ftitlea Predictions for Actual Productivity and Investment} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Business Productivity\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure11.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl The boom\hfill}} {\hbox to 3truein{\sl in productivity\hfill}} {\hbox to 3truein{\sl was even bigger\hfill}} {\hbox to 3truein{\sl than we thought\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Investment\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure12.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl The boom\hfill}} {\hbox to 3truein{\sl in investment\hfill}} {\hbox to 3truein{\sl was even bigger\hfill}} {\hbox to 3truein{\sl than we thought\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Model Intangible Share of Total Output\ \widehrulefill} \bigskip \medskip \def\epsfsize#1#2{0.3#1} \no{\hskip -.5truein\epsffile{sFigure6.eps}\hskip 0truein \vbox to 4.5truein{{\hbox to 3truein{\sl Bottom line:\hfill}} {\hbox to 3truein{\sl intangible}} {\hbox to 3truein{\sl investment}} {\hbox to 3truein{\sl was large\hfill}} {\hbox to 3truein{\sl in late 1990s!\hfill}} }} \newpage \centerline{\ } \vskip -20pt \line{\smcaps Conclusion\ \widehrulefill} \bigskip \bigskip \item{\bul} 1990s boom seemed puzzling from the perspective of theory. \bigskip \bigskip \item{\bul} It's not. \bigskip \bigskip \item{\bul} Accounting for expensed and sweat investment, we find \bigskip \medskip \itemitem{\cir} Dramatic increase in hours \bigskip \itemitem{\cir} Dramatic increase in capital gains \bye