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famous 1987 quip, 'You can see the computer age everywhere but in the productivity statistics,' had finally been repealed."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.

- Milton Friedman

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