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Discussion of Oulton and Srinivasan (O-S) on Capital and Depreciation Robert J. Gordon Northwestern University and CEPR ECB/CEPR/BdE Conference on Prices, Productivity, and Growth Madrid, October 17, 2003 The Macro Context of this Topic Capital Stocks, Capital Services, and Depreciation Services/Stock = Utilization Y = F(N,UK) not = F(N,K) A leading “explanation” (really a byproduct) of the puzzle of procyclical Solow residual and SRIRL Work by Basu-Fernald and Eichenbaum Macro Error in ignoring fluctuations in capital (capacity) utilization Macroeconomists in the Keynesian Tradition have always treated capacity utilization as a byproduct of business cycles; utilization completely endogenous Much of the recent macro literature, esp. the RBC and its variants, err by ignoring utilization and then can’t explain impulse-response after technology shocks Steel in U. S.: 18% utilization rate in 1932 Sometimes We May Forget How Much Utilization Can Vary Steel Industry Capacity and Production in Tons, 1929-41 90 80 70 60 50 Actual Capacity 40 30 20 10 0 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 What Did We Know about This Topic in 1967? Perpetual Inventory Capital Stocks Fails to Reflect Cycles of Investment Exaggerates importance of physical depreciation Office buildings are torn down when new buildings are constructed, same for personal computers One-hoss shay vs. geometric depreciation Ignores distinction between depreciation and retirement Physical depreciation can be offset by maintenance, rarely reflected in official data The story of this afternoon, rental shelter prices Summary of Paper Correctly endorses physical interpretation of capital stock, services, depreciation Why we don’t want a wealth concept Central concept of “VICS” – volume index Most surprising result: “no tendency for agg depreciation rate to rise over last two decades” asset prices – Tobin’s q, stock market bubbles Why? Echoes Oliner-Sichel (1994) and Sichel (1997) that “computers are just too small to matter.” Changing share offset by declining relative price Yikes! What is going on with U. S. productivity? The Basic Flaw in the Paper is the Failure to Define the Question Are we talking about capital as wealth or as an input into the production function (Y = F(N,UK) Endorses geometric depreciation Differs from my one-hoss shay approach My productivity in last night’s hotel room The irony of the paper is that they reject wealth criteria but then implicitly impose a wealth criterion when endorsing geometric depreciation The right criterion: one-hoss shay with a maintenance adjustment A Misleading Message about Aggregation “The Main Difference between the VICS and wealth-type measures of capital is the way in which different types and ages of assets are aggregated together.” NO! The main difference is that VICS measures are impervious to asset-price bubbles but wealth-type measures of capital are not. Why Should We Care? As Economists, because there is so much of macroeconomics that involves TFP Simple definitional production function y = a + bn + (1-b)k a = y – bn – (1-b)k a = y-n – (1-b)(k-n) Conclusion: Measurement errors in k create opposite signed errors in TFP What the Paper Contributes We can endorse Physical measure of capital vs. wealth What we cannot endorse The theoretical section (pp. 28-39) never writes down a production function Paper is totally unclear vs. obsolescence-type depreciation and its effect on wealth and the input of capital into the production function The section on Aggregate Depreciation Very important result that under chainlinking the aggregate real depreciation rate can rise without limit, eventually exceeding the rate on any individual asset But “what else is new”? We have been educated by the BEA and others since 1996 that in a world of chainweighted deflators and real GDP, NOTHING is additive! US vs UK, Geometric vs. Augmented Straight Line Paper’s useful dichotomy Alternative approaches to depreciation do NOT have any impact on the growth rates of the capital stock in steady state But the chosen depreciation rate assumption obviously affects the LEVEL (or VALUE) of the stock. The Heart of the Debate P. 36 (“Sometimes it is argued that only physical wear and tear should go into the measure of depreciation used to construct capital stocks”) This section is totally devoid of the question we want to answer by constructing such capital stock measures. Other Central Conclusions Growth rates of wealth and of VICS are insensitive to variations in depreciation rates, i.e., asset lives The LEVEL of wealth is sensitive to depreciation rates Why should we care? What is the question? The input of capital into the production function answers a very different question than wealth in the consumption function Estimating Depreciation in practice, pp. 41 ff Distinction between the “pure age effect” and also the “effects of changing quality.” Too much emphasis on computers Diminishing returns to quality improvement in computers (my anecdotes, could have done it on a park bench) Contrast with planes, trains, and automobiles Here the one-hoss shay model operates with the added impact of maintenance Why do people buy new cars? The bottom line, pp. 60-61 No big changes in depreciation/GDP over time Echoes Oliner/Sichel (1994) and Sichel (1997) Computers are still a small part of the capital stock Structures are still a very large part of the capital stock Come back at 1600H for our discussion of housing price indexes Could you believe that housing prices is a more important topic than computer prices?