Thursday, December 29, 2011

"unexpectedly strong productivity growth"


From the same Working Paper I referenced yesterday morning:

During the so-called “New Economy Era,” labor productivity (output per hour) played a key role in shaping the Federal Open Market Committee’s (FOMC) response to evolving economic conditions. Indeed, productivity discussions have a long history at FOMC meetings. For instance, unexpectedly strong productivity growth during the early 1980s generated arguments that would become familiar to participants more than a decade later.

Hmm. Productivity growth during the "New Economy Era" of 1994-2001... and productivity growth "during the early 1980s".

Went to FRED. Searched for output per hour. Found 26 series. Some are for manufacturing in other nations. Some have start-dates in the 1980s and 1990s. I sorted the results by start-date, selected the four domestic (U.S.) series with start-dates before 1960, and clicked Add to New Graph:

Graph #1: Four Measures of Output per Hour

Next, I looked at it on a log scale, because it was easy to do:

Graph #2: Same as the first graph, but on a Log Scale

I want to see the changes in output per hour. So I turned off the log scale and looked at "percent change from year ago" values:

Graph #3: Same as the first graph, but as Change from Year Ago
Not so obvious before 1960 where the recessions are close together, but after 1960 it seems that productivity spikes up immediately at the end of a recession, then trends more slowly downward to the next recession. You can see it after the 1960 recession and maybe the 1970 recession and definitely after the 1974 recession and the 1982 recession and the 2001 recession.

But not after the 1991 recession. From maybe 1993, productivity trends upward to 2000 or later. This difference corresponds to the "New Economy Era" (1994-2001) described in the working paper. This is the same period that Robert J. Gordon has called the U. S. macroeconomic miracle.

I want to focus now on Output per Hour in Manufacturing in the United States, the green line from Graph #3 above:

Graph #4: Output per Hour in Manufacturing (U.S.)

I see two spikes between 1982 and 1990. The first comes at the end of a recession. The second comes later, more like the result of a "miracle" than the aftermath of a recession. This, I suspect, is an indication of the "strong productivity growth during the early 1980s" noted in the working paper. Despite the date discrepancy.

Now I want to take Graph #4 and add to it in red the percent change numbers for base money:

Graph #5: Growth rates of Output per Hour (green) and Base Money

Between the 1974 and 1980 recessions the red and green lines quite clearly move in opposite directions. But that pattern changed. Coming out of the 1982 recession productivity and money growth peak twice, simultaneously, before the next recession. Then, beginning with the 1991 recession, both lines show a third peak, this time a double-peak. And in the latter 1990s -- the "new economy" years -- the red and green lines quite clearly move together.

The three peaks I point out, between the 1982 recession and the mid-1990s, are the same three bumps I have pointed out several times before on this blog.

The red line on Graph #5 shows the growth rate of base money. For the record, base money is money actually issued by the central bank of a country.

Those bumps in the money are part of a policy that allowed "unexpectedly strong productivity growth" to develop, ever so briefly.

9 comments:

jim said...

Art wrote:
Those bumps in the money are part of a policy that allowed "unexpectedly strong productivity growth" to develop, ever so briefly.

_____________________________

I'm sorry but that sounds like a fairy tale to me. It is something similar to the "Princess and the Pea" where the effect of a tiny thing is exaggerated beyond recognition.

Those little bumps in your graph represent about $30-$40 billion per year which is about equal to 10 minutes worth of trading at the DTCC

http://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation

I can't see how you can draw a conclusion those fluctuations are driving anything. I can't see any causal relation to unemployment.

What the change in AMBSL relates to is the Fed's efforts to maintain the correct amount of bank reserves. That is determined by how much currency the public wants. If you and I want to have more paper with dead presidents in our wallets and under our mattresses, then the Fed is obliged to issue more base money or the banks will be short of reserves.

http://tinyurl.com/c2e4s8k

If you subtract AMBSL-Currency you get the minimum reserves bank's are required to hold (before 2008 banks held the minimum). There may be a relationship between how much currency people want to hold on hand and unemployment, but I don't think you can leap to any conclusions about the puny sum of money banks hold in reserve was doing anything at all (other than what it is intended to do, which is make you believe banks are solvent). It is just another manifestation of how close the financial system had cut the margins. The system became fragile because their was no margin for error. Any dime or nickel held in reserve was a dime or nickel in lost profit. When the financial meltdown occurred there was only 90 billion in bank reserves. That is the pool of money from which banks would pay you if you wanted your money in cash. That is about $250 per capita to satisfy the public's desire for cash should it arise.

Jazzbumpa said...

From the earlier post.

The appropriate analysis is the analysis of monetary causes of the productivity acceleration of the 1994-2001 period.

Jim beat me to it, but I see no reason for there to be cause and effect here.

For instance, unexpectedly strong productivity growth during the early 1980s . . .

It's been quite a while since I looked at productivity, and I never did any kind of deep dive. But the above quote from the working paper is nonsense. There was one year of strong productivity growth in the early 80's. Beyond there, there were no stand-out years.

After 82, though, there were no years in which (non-farm) productivity growth dipped below 0. I graphed it.

http://1.bp.blogspot.com/_demjwEAaVyw/TUYs_UrvU_I/AAAAAAAABKE/jS9DRMdcoZA/s1600/Productivity.jpg

Green line is 5 Yr Avg.

Here is the post.

http://jazzbumpa.blogspot.com/2011/01/what-made-50s-through-70s-so-special.html

The absence of extremely low values allowed the 5 yr average to rise, but it never got above the whole data set avg. (blue line) until almost 2000.

Re: graph 5, when you see two phenomena move from contrary to similar motion, that's a strong argument that there is no real correlation. Look at from '89 to about '97. The two lines are not really moving similarly there.

Near lockstep since '99 though. But - my graph, which is a broader segment does not seem to follow the same pattern in recent years.

There are other things going on.

Cheers!
JzB

The Arthurian said...

Jazz: "There are other things going on."

Yes. And everyone else is all over those things. And I have nothing new to add to that discussion, except perhaps to say that it's getting tiresome. Meanwhile, no one is looking at monetary imbalance, which is the only thing I look at.

As usual Jazz, good analysis of the graphs. I noticed also, there were "no stand-out years" in the early 1980s, but a consistent plus-side pattern... I took the PDF's "early 1980s" for a mistake that should have referred to the late-1980s spike, the one that reached as high as the typical end-of-recession spike of 1982.

Jim,
If you take Graph #5 here and add it to the collection of graphs in my Debt Relatives: The Rise and Fall of the Non-Federal Relative of 14 July past (...which apparently I failed to link in the above post...) perhaps you will see that I am not simply jumping to conclusion from one graph. The "causal relation to unemployment" is considered in the older post.

re DTCC, If there is any consistent relation between the volume of market trading and the health of the macro economy, I am not aware of it.

Jazz: "Re: graph 5, when you see two phenomena move from contrary to similar motion, that's a strong argument that there is no real correlation. Look at from '89 to about '97. The two lines are not really moving similarly there."

When I see two phenomena change from contrary to similar motion, I think there has been a change in the economy, probably a change in policy... What's the date of that change? Oh! Somewhere around 1980, it looks. JAZZ, YOU SHOULD EXPECT TO SEE A CHANGE THERE.

Look at 1989-1997. The pattern is most definitely the same. Only the sizes differ. Furthermore: All I claim is similarity. I do not claim correlation. I think you are exaggerating my statements and disputing the exaggerations as though they were mine.

Jim: "What the change in AMBSL relates to is the Fed's efforts to maintain the correct amount of bank reserves."

What the change relates to is the Fed's effort to satisfy the dual mandate.

I've been looking at some more FRED while writing this reply. It looks to me that Federal deficits are much larger than additions to base money and would have a much bigger effect... Clonal pointed this out some months back as I recall.

However, base money is set by policy. On purpose. Deficits are created despite the best efforts of the people creating them. Base money is increased on purpose; deficits are increased by accident.

I think what happens by accident is a clue as to what is wrong with policy. But my concern is policy.

jim said...

Hi Art,

What I'm saying is that AMBSL is defined as Currency + Bank Reserves. Currency is defined as currency held by the public. The currency in bank vaults is part of bank reserves. When the public chooses to hold more currency (if the reserve requirement doesn't change) then AMBSL must increase. And when the public chooses to hold less currency then there will be excess reserves unless AMBSL decreases as much as Currency.

It is pretty clear from looking at the data that changes in AMBSL move in lock step with changes in Currency. That is empirical evidence that the "bumps" you are attributing to "policy" are in fact only the banking system and Fed reacting to the public's preference to holding cash at any particular point in time.

Jazzbumpa said...

Look at 1989-1997. The pattern is most definitely the same. Only the sizes differ. Furthermore: All I claim is similarity.

Once again, you and I look at the same graph and see different things. Zoom in on the '89 - 2000 period.

http://research.stlouisfed.org/fredgraph.png?g=46K


I see the an AMBSL low in '90 with output continuing to increase; '91-'92 contrary motion. The '92 low in AMBSL lines up almost perfectly with the peak in output. From there the motion is contrary for a year. Then output moves up after the AMBSL has peaked and flattened. Output creeps up after '95, while AMBSL continues to fall. AMBSL leaps to a peak in 2000, while output continues a slow climb.

There is no similarity in that period.

Furthermore: All I claim is similarity. I do not claim correlation. I think you are exaggerating my statements and disputing the exaggerations as though they were mine.

Art - you go beyond claiming correlation. On Wednesday, you claimed cause and effect. (emphasis added.)

And as a hint in what direction the analysis should proceed, consider that the Federal Reserve sets monetary policy. The appropriate analysis is the analysis of monetary causes of the productivity acceleration of the 1994-2001 period.

Cheers!
JzB

The Arthurian said...

Yeah Jazz, you should read that post.

with an open mind.

Jazzbumpa said...

Mind opened.

Post read.

It's a good story. I kinda like it.

While reading, I generated this graph, which may or may not be useful.

http://research.stlouisfed.org/fredgraph.png?g=47o

But I don't see the relevance to the topic of this post, relating AMBSL to productivity. What am I missing?

And it certainly side-steps the observations in my 1:57 post, which I think are relevant and deserving of a response.

Also, can you construct a narrative as to why there should be any correlation between AMBSL and productivity?

Cheers!
JzB

The Arthurian said...

Jazz, I apologize for that last remark.

I woke up with a thought... I am not capitalizing AMBSL to emphasize it, but only because that is its name.

I emphasize the difference between money and debt, a difference most often ignored. The least debt-like money is base money, ambsl, so I turn to that sometimes when I want to distinguish money from debt.

Ordinarily I use M1, spending money. Apart from the initial deposits made by lenders into our checking accounts, M1 is non-debt money, and it circulates.

I avoid MZM because I think it is much nearer to debt... If you can earn interest on it, then it is definitely somebody's debt.

I am getting ready to agree that Federal debt is not debt of the private sector, but money, just as the money I myself borrow and spend is money (not debt) for the next guy... Even though I pay interest on it, and this has macro effects on the economy, the recipient neither pays nor receives interest on the money as a result of having it.

So I am all up in the air about WHICH MONEY to use. This doesn't bother me at all. But it seems to bother other people a lot.

What interest me beyond all is the ratio of this money, whichever money it is, to debt, private debt, maybe total debt.

I should do DPD graphs for public and private debt separately.

Clonal questioned my use of AMBSL back in September and said the relevant money was Federal deficits, and he opened my eyes, but I have not yet satisfied myself with graphs.

I don't try to explain a relation between AMBSL and productivity. I try to point out a relation between [(increased use of non-debt money like ambsl) and (decreased use of credit)] and [productivity and inflation and unemployment and economic growth].

Jazzbumpa said...

I try to point out a relation between [(increased use of non-debt money like ambsl) and (decreased use of credit)] and [productivity and inflation and unemployment and economic growth].

OK. Pick a money measure, a debt measure, a growth measure, and let's do a deep dive.

Cheers!
JzB