Friday, September 26, 2014

I have to look into this more


Like pulling teeth, but pushing: to get ideas into my brain.

If I understand it right, "Total Factor Productivity" is a discrepancy. When you try to explain growth, you say: Okay, we've got labor, and we've got capital, and we take and mix them together in a big bowl and look at what we've got. You put another bowl next to it, that has GDP growth in it. And you compare the two.

What you see is that the GDP growth bowl is pretty close to full, but our labor-plus-capital bowl is half empty. So we have to add something to the labor-and-capital mix, until the one bowl is just as full as the other. And then we'll say we understand economic growth.

The thing we add to the bowl is called "Total Factor Productivity". The amount we have to add is the amount that makes the bowls equal. That's why I say TFP is a discrepancy. For every spoonful that our bowl is low, we add a spoonful of TFP.

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So... the amount of TFP depends on the size of the discrepancy. Or take the bowls away and look at graphs, and say the value of TFP depends on how much we have to push up our calculation-of-growth line to make it match the official estimate of GDP growth. Something like that.

So the TFP number is the number that gives us the answer we were looking for, the answer that matches the GDP number. I'm not saying I'm doing sophisticated analysis here. I'm just saying it's what I understand.

But you see what I'm saying: If GDP is a line on a graph, and our labor-and-capital calculation is a lower line on that graph, then Total Factor Productivity has to be the number that fills the space between the two lines. There's not a lot of wiggle room.

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So, assuming that's correct. then how can there be two different measurements of Total Factor Productivity??? There can't be. If we know what the GDP number is, and the labor number, and the capital number, then TFP has to be some particular number. If GDP is 10, and labor is 5 and capital is 3, and if our formula tells us that 10=5+3+X, then X has to be 2.

Like X, TFP has to be some particular value to work with the other numbers, which are givens. But remember the overlay graph I showed the other day?

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top image

Graph #1: Beckworth's TFP (blue) Overlaid on FRED TFP (red)

We've got two different measures of Total Factor Productivity.

What I think is, the numbers Beckworth used are figured a different way. They're not just a measure of the discrepancy. There's more economic thought behind those numbers. I have to look into this more.

3 comments:

The Arthurian said...

I'm looking at this.

Gene Hayward said...

You know I am barely literate on this stuff so bear with me. :)

Is the "Captial" referred to by you and all the other sources only "Physical" capital or does it include "financial" capital or "finance" as you refer to it often?

I know you often speak of "Finance" as not a productive resource (for the most part) BUT it does add to GDP.

I guess what I am really saying/asking is if Finance does not factor into Capital in the equation you use but shows up in GDP anyway, does that account for some of the discrepancy?

Probably off base, but that is a thought that came to me. Thanks in advance for supporting or refuting. :)

jim said...

It strikes me that TFP is a way of looking at the world that matches the current tax structure. Business costs are allocated into 3 buckets. The cost of labor, the cost of capital and the cost of "everything else". The tax system taxes each of these buckets differently. The salary and wages of labor component are taxed at one rate, capital gains at another rate and generally "everything else" is tax exempt.

The "Everything Else" includes the cost of energy, the cost of interest and the cost of raw materials. Also when a a company outsources something they used to do in house that may shift the portioning of some costs from labor and capital to "everything else". So ask yourself, what happened to the cost of energy, raw materials and interest starting in 1973?

The story that 1948-1973 was a period of great efficiency and technology gains in "everything else" component is laughable. That was the period of great wastefulness in energy and raw material use.