Productivity will continue to expand rapidly because information technology will be applied in new ways. The key trends in business philosophy give the U.S. a big competitive advantage in this area.

Let's examine the factors and implications associated with this trend.

Martin Feldstein addressed the causes of accelerating productivity growth in a working paper titled "Why Is Productivity Growing Faster?" It was published in March, 2003 by the National Bureau of Economic Research. Feldstein, of Harvard University, served as Chairman of the Council of Economic Advisors in the Reagan administration.

As Feldstein puts it, the simple explanation for why productivity has grown faster in the past seven years than in the previous 25 is information technology, or IT. Everyone agrees that IT has allowed U.S. companies to be more productive. But that's not the whole story. European and Japanese companies had access to the same technology, yet their productivity growth has actually declined.

In the U.S., non-agricultural business productivity rose 1.6 percent annually from 1970 to 1995. From 1995 to the present, that rate has been 2.6 percent. The latest figures available, ending in the third quarter of 2002, show a one-year growth rate of 5.8 percent. Some of that reflects a partial recovery from 2001, but the latest two-year average is 3.1 percent.

By contrast, productivity growth in Europe and Japan has dropped since 1995, when compared with previous periods. Employment there is flat, and estimates by the European Commission's Economic Review predict that productivity growth in Europe over the next 50 years will be half of what it is in the United States.

While the highest productivity gains in the U.S. were among producers of IT, users of IT saw significant growth, too. One possible reason is that the new technology has done for managers something analogous to what the industrial revolution did for workers. A single manager can communicate directly with many more people than ever before, making it possible for a company to run with fewer levels of management and support staff.

Feldstein estimates that the increase in productivity translates to a seven percent drop in the staff required in U.S. firms to do the same amount of work. That isn't possible in Europe for a number of reasons. ...