Gimmie Some Slack

I like graphs. I like 'em because they make it easy to see trends. But I don't like to look at every little wiggle on a graph and point out significance. Wiggles are wiggles, trends are trends.

This time I go against my better instinct.

I was looking for something on productivity. At the Center for Economic and Policy Research (CEPR) I found The Real Economic Crisis by Dean Baker and John Schmitt, dated October 14, 2007.

The focus of the article is "the sharp deceleration in productivity growth since the middle of 2004." Scattered among the comments and insights in the paper is a little history of U.S. productivity. That's my focus here.

From the article:

Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States.

From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply.

In summary:

1947-1973	1973-1995	1995-2004	2004-2007
GOOD	NO GOOD	GOOD	NO GOOD

What accounts for these changes? In particular, what causes the "no good" periods? Baker and Schmitt don't say. They say productivity decline "constitutes a serious long-term threat to US living standards." They say Europeans should "consider these data carefully" before adopting policies similar to those of the U.S. But they don't say what might account for productivity decline.

I'll tellya what accounts for it: DPD, that's what

My DPD ("Debt per Dollar") graph has an interesting fit to the productivity pattern. Debt-per-dollar moves consistently downward during the Roosevelt era, reaching a bottom in 1947. Just as it starts upward, Baker and Schmitt's "golden age" begins.

DPD increases and productivity is good until 1973, when debt reaches a Laffer limit. After that, continuing to increase our reliance on credit does more harm than good. Debt-per-dollar continues to rise exponentially. Productivity founders.

Then around 1990, debt-per-dollar turns briefly down again. Around 1994 DPD turns upward. According to Baker and Schmitt, productivity suddenly "accelerated rapidly."

Debt was beyond the Laffer limit in the 1990s. But a few short years of DPD downtrend relieved some pressure and gave us a decade of "golden age" productivity.

The graph shows a much steeper DPD climb after 1994 than before 1990. It shows our economy using up the slack created by the 1990-1994 downtrend. That slack was exactly what our economy needed in order to grow.

By 2004, the DPD slack was gone, and "productivity growth dropped sharply."

That's my story, and I'm sticking to it.

1947-1973	1973-1995	1995-2004	2004-2007
GOOD	NO GOOD	GOOD	NO GOOD