Monday, February 27, 2012

FCM and the "Macroeconomic Miracle"

I still want to look at the Factor Cost of Money in relation to the "macroeconomic miracle" years.

Robert J. Gordon, 2002:
NBER Working Paper No. 8771
Issued in February 2002
This paper examines the sources of the U. S. macroeconomic miracle of 1995-2000 and attempts to distinguish among permanent sources of American leadership in high-technology industries, as contrasted with the particular post-1995 episode of technological acceleration, and with other independent sources of the economic miracle unrelated to technology.

Dean Baker and John Schmitt, 2007:
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.

James Kahn and Robert Rich, 2011:
Following a resurgence of strong productivity growth in the late 1990s and early 2000s after nearly a quarter-century of slow growth beginning in 1973, the latest reading from a trend tracking model now indicates that slow productivity growth returned in 2004.

Mary Amiti and Kevin Stiroh, 2007:
Chart 1
Trend Labor Productivity Growth
Chart 1 - Trend Labor Productivity Growth
Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2007,

Notes: Labor productivity is defined as real GDP per hour worked. Trend estimates are based on a Hodrick-Prescott filter with a smoothing parameter of 100.

That blue line on their chart shows US productivity dropping off continuously from 1961 to 1978, dragging the bottom till 1993, then rising during the "miracle" years.

Finally, I came upon BLS productivity numbers for 1990-2011. I figured the annual change in productivity, and plotted that against the Factor Cost of Money as a percent of GDP:

Source: My Google Docs Spreadsheet

I'm not making any bold claims for this graph. But it looks to me like productivity and the factor cost of money tend to move in opposite directions.

Keep in mind that productivity is not a policy; it is a goal. Monetary policy is policy. So if there is causality, it is the factor cost of money that influences productivity. Not that monetary policy presently pays attention to the factor cost of money. But maybe they should.


In evaluating my graph, I would ask that you not only point out its weaknesses but also examine its possible strengths. Ask, for example, Does it make sense?

For example: If our basis for comparison is Krugman's concern with the Zero Lower Bound and the need to have negative interest rates to revitalize the economy, then yes, it makes sense in that context. Negative interest rates would reduce the Factor Cost of Money, and reducing the FCM would enhance productivity and growth.

Given this basis of similarity, let me point out what the FCM captures. It is not only the rate of interest, but also the size of accumulated debt that affects the cost that inhibits growth.

Examine the strengths.

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