Productive Argument, with a Touch of Irony

In their 2007 article The Real Economic Crisis, Dean Baker and John Schmitt attempted to shift attention from "the bursting of the US housing bubble" to "the sharp deceleration in productivity growth since the middle of 2004."

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.

Again, summarizing those dates, we observe:

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

Andolfatto links to The Productivity Slowdown Reaffirmed by James Kahn and Robert Rich, and offers a snippet from their opening paragraph:

Economists generally agree that productivity is the primary ingredient for sustainable growth in GDP and wages. The August productivity data release provided some clarification regarding trend--or long-run--GDP growth, but the news was not good: 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.

Kahn and Rich do indeed reaffirm the termination dates 1973 and 2004 noted by Baker and Schmitt -- and reaffirm the "goldenness" of the 1947-73 period.


David Andolfatto's post is a follow-up to his What output gap? on James Bullard's "wealth shock" theory.

Thus in the new post Andolfatto expands on the consequences of overestimating Potential GDP or trend growth. He refers again to Kahn and Rich:

It is widely believed that the difficulty of detecting a change in trend growth contributed significantly to the economic instability of the 1970’s, as policymakers were unaware of the slowdown in productivity growth for many years, and only much later were able to date the slowdown at approximately 1973. This resulted in overestimating potential GDP (at least so the conventional wisdom goes) and setting interest rates too low, and double-digit inflation followed not long after.

If the Fed permits money-growth commensurate with an over-estimate of Potential Output, the result will be inflation. The argument for slower money growth today gains strength by comparison with the 1970s (because we know what happened then). But this does not mean the argument is correct.

We don't know that the circumstances are similar. We cannot measure Potential Output. It is all a guess. Dismiss the analogy to the 1970s, then do what you will with the rest of their argument.


At the Fed, they attribute changes in productivity trends to "events such as wars, changes in government policies, or structural change in the economy" (Kahn and Rich). Elsewhere, that is. Anywhere but at the Fed.

I on the other hand attribute changes in productivity trends to changes in the debt-per-dollar ratio, the reliance on credit and the factor cost of money. Nowhere but at the Fed.

Here's the thing. At the Fed, they're wearing blindfolds and swinging sticks, trying to hit Potential GDP. Meanwhile, I am saying that what they think are changes in Potential Output are simple results of changes that you can see in the debt-per-dollar curve.

[ Part 1 ]	[ Part 2 ]	This is Part Three