Friday, March 13, 2015

The Magic

It's 2 o'clock in the morning. The puppy got me up. She's back to sleep now, but I'm not. So let me look at Doug Henwood's recent post at LBO News: The productivity slowdown: Is structural stagnation our fate? Henwood considers good times and bad times in labor productivity, same as we were looking at yesterday.

At first, Henwood says, he didn't accept Greenspan's notion of "the productivity acceleration of the late 1990s." By the time he did, around 2004, the productivity acceleration was just about over, he says. Sounds about right. Henwood was more cautious than Robert J. Gordon (see yesterday's post) in accepting the notion. But the economy was changing while he waited. So it goes.

Henwood writes:

Note that during the economic Golden Age—roughly 1950–1973—trend productivity growth averaged 2.8% a year. That sank to 1.5% between 1974 and 1995, then rose to match that 2.8% figure between 1996 and 2005. At the end of last year, trend productivity growth was a dismal 0.6% a year, the worst since these modern numbers began.

Dean Baker and John Schmitt (see yesterday's post) show pretty much the same pattern in the productivity numbers.

What did Doug Henwood see as the driving force behind the productivity acceleration? Technology; "... as painful as it was to admit," he writes, "Robert Solow’s famous 1987 quip, 'You can see the computer age everywhere but in the productivity statistics,' had finally been repealed."

In agreement with Alan Greenspan and Robert J. Gordon (see yesterday's post).

But productivity growth slowed around 2004. How is this explained? Henwood turns to John Fernald and Bing Wang. He writes

Their analysis is that “the low-hanging fruit of IT-based innovation had been plucked.” (They’re economists, so they can be forgiven the use of that cliché.) Just as the acceleration of the late 1990s was driven by IT-using and heavy IT-using industrial sectors, the slowdown has been led by those sectors as well. In other words, the magic has gone out of IT.

The magic is gone.

Isn't that just a little lame?

Productivity drives growth. Nobody denies it.

From the point of view of the real income of the American people, nothing is more important than increasing productivity.

And yet... if productivity drives growth, then maybe growth drives productivity too. Things like that happen a lot in the economy. Feedback effects.

What happens sometimes, though, is that economists get things backwards. I mean, for example, suppose it is growth that drives productivity. And then, "productivity drives growth" is the feedback effect. If that were true, we'd be wasting our time if we were doing things to boost productivity. We'd want to be doing things to boost economic growth, and let the growth boost the productivity.

When you hear someone suggest it's growth that drives productivity, you can't help but notice that's backwards from how we have it. That makes it difficult to accept. We must have it right; it must be productivity that drives growth.

I hope you can see how empty that is, that defense of how we have it.

Anyway, Matias Vernengo seems to think we have it backwards:
Technological determinism is widespread. The Solow model basically suggests that it is technological progress, measured incorrectly as Total Factor Productivity (TFP), that drives growth. The same is true of Schumpeterian models...

What is NOT discussed in most analyses of the technological determinism by conventional and more than a few heterodox authors is the role of demand in creating the conditions for technological change.

I think he's onto something.

If Vernengo is right, then we do not have to explain the productivity of the late 1990s. We have to explain the growth of the late 1990s. Is that growth explained by technology? To some extent, yes, of course. All that buying of new computers and new software, that had to boost the economy some. But isn't the argument weak? Don't we need something more solid?

Okay, growth. What do we need for growth? We need to produce more, and we need people to buy the stuff.

I suggest that one way to do that is to increase our use of credit. (Hold on, now. I am not saying I want us to increase our use of credit. I am saying that is the technique we use, that is the method by which we obtain growth. I think we need to finesse the method and improve it. But I'm not talking about what we ought to do. I'm talking about how we got the growth and productivity we got in the late 1990s.)

One way to produce more and consume more is to use more credit. Did we do that in the late 1990s? Yeah, we did. But that's not what happened first. First there was a slowdown in debt growth that lasted almost ten years. That slowdown began in the mid-1980s. We were accumulating less debt because we were using less credit, or because we were paying off more debt, or both. That was the first thing that happened.

The second thing that happened was that there was an increase in the amount of spending-money in the economy. A big increase. So people had more money to spend.

So by the mid-1990s people had less debt and they had more money to spend. That sounds to me like a good way to get the economy to grow. And you know what? The economy grew.

Related post: Evidence that Reducing Debt is the Solution


jim said...

"So by the mid-1990s people had less debt and they had more money to spend'

where did that idea come from?
It looks to me that household debt increased by $300 billion per year from 1985 to 1998 and then it started to increase rapidly up to its peak of $1.3 trillion additional debt per year in 2006.

It is true people had more money to spend. At least $300 billion more. That's about $2000 per household per year.

geerussell said...

I mean, for example, suppose it is growth that drives productivity. And then, "productivity drives growth" is the feedback effect. If that were true, we'd be wasting our time if we were doing things to boost productivity. We'd want to be doing things to boost economic growth, and let the growth boost the productivity.

To me that dovetails with the productivity-is-procyclical argument here from Bill Mitchell:

In fact, a strong positive relation between output per hour and the business cycle is observed in the real world. We call this a pro-cyclical movememnt in output per hour, which means that output per unit of labour input increases as the level of production and employment increases.

The pro-cyclical pattern of labor productivity (output per hour) means that costs per unit of output will not increase as output increases. Total costs will obviously rise but the per unit costs will decline as the economy approaches full capacity.

Jazzbumpa said...

There are a couple more things to consider.

In the late 90's, labor's share increased dramatically. Since 2000 it's been in a death spiral.

The rate of increase in real disposable income, was accelerating during the 90's.

Spending drives growth. people had money to spend. Now they don't.

I reworked jim's graph to show YoY % change. People are not supplementing income with borrowing like they have done all my lifetime, until the GR.

They have no money to spend, so the economy is going nowhere.


Jazzbumpa said...

Should have included this. Growth in real disposable income peaked in Q3 1998. Clear down trend since.


Jazzbumpa said...

Also meant to post the rework of jim's graph.


The Arthurian said...

Jazzbumpa's #1485 (blue) to which I added Percent Change from Year Ago for TCMDO debt (red).

They're similar. And they both have a long (20-year) span from the mid-1980s peak to the following peak, and show that the growth of debt was relatively slow for a relatively long time -- and thus, that debt was less than we might have expected, something Jim fails to see.

The Arthurian said...

Major. I left out the word major. I should have said "a long (20-year) span from the mid-1980s peak to the next major peak". Damn! Jim will be on my ass again.

jim said...

Jazz wrote: "Spending drives growth."

Not necessarily. Some spending doesn't contribute at all to growth or production.

"People are not supplementing income with borrowing like they have done all my lifetime, until the GR."

People (households) borrowing only represents 1/4 of all US borrowing, but no matter what entity does the borrowing it results in more spending.

The pertinent question is what is the nature of that spending? As Richard Werner correctly points out some borrowed money is spent such that it increases GDP and incomes and other borrowed money goes to inflating the price of assets. Corporations borrowing to buy back their stock would be an example of the latter, where it produces no increase to GDP but it does increase the value of shares. Borrowing to buy a new car funds the production of the car and increases GDP by that amount (minus whatever amount of the car was imported).

Art, I see the period from the mid 1960's to the early 80's as a period where household debt stayed about proportional to GDP after that it increased faster than GDP.

I don't see anything at all that supports a claim that "by the mid-1990s people had less debt" As far as I can see all the growth of the 90's was fueled by debt that grew even faster than production grew. The only period in recent history where growth has not come by way of borrowing is in the last 6 years.

Unfortunately it is painfully obvious that a significant amount of the extra spending that came from borrowing funded the inflation of asset prices instead of funding growth of GDP. And what is even more unfortunate is most of the debt is back by collateral that consists of those highly inflated assets. That makes it a huge house of cards that collapses the instant those assets can no longer maintain there overly inflated values.

The Arthurian said...

Jim -- I respond here:

jim said...

Sorry I'm not getting it.
I still don't see anything that supports the claim that "by the mid-1990s people had less debt"

It looks to me that the mid 1990's was preceded by 10 years of household debt accumulation on an unprecedented scale relative to GDP. If you want to use real GDP instead it looks even worse.

The Arthurian said...

Too bad.