Productivity, Growth, and Cost

In the year 2000 Alan Greenspan looked to improved productivity as the reason the economy was so good:

In the last few years it has become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterized post-World War II America. Not only has the expansion achieved record length, but it has done so with economic growth far stronger than expected. Most remarkably, inflation has remained largely subdued in the face of labor markets tighter than any we have experienced in a generation.

A key factor behind this extremely favorable performance has been the resurgence in productivity growth.

Stands to reason. If we produce more per hour than we used to, and nothing else changes, then output will go up.

Yet only a couple years later, Greenspan was puzzled. Productivity growth was impressively good, but economic growth was not:

The increase in nonfarm business output per hour over the past year will almost surely be reported as one of the largest advances, if not the largest, posted over the past thirty years. We at the Federal Reserve, along with our colleagues in government and the private sector, are struggling to account for so strong a surge. We would not be particularly puzzled if the increases in output per hour were occurring during a period of very rapid economic growth, such as has often attended recoveries from steep recessions... But during the past year we averaged only modest economic growth.

Evidently, productivity growth is not the whole story when it comes to economic growth.

//

In the latter speech, Greenspan said

From an average annual rate of 1-3/4 percent in the late nineteenth and early twentieth century, it jumped to a 3-3/4 percent rate in the decade following World War I. Subsequently, productivity growth returned to a 1-3/4 percent pace. Then, for the quarter century following World War II, productivity growth rose to an average rate of 2-3/4 percent before subsiding to a pace of 1-1/2 percent annually from the mid-1970s to the mid-1990s.

And then, looking back over the latter 1990s from his 2002 perspective:

Over the past seven years, output per hour has been growing at an annual rate of more than 2-1/2 percent, on average, compared with a rate of roughly 1-1/2 percent during the preceding two decades.

It seems that good productivity and a good economy go together. Productivity was good in the Roaring '20s, and in the Golden Age following World War Two, and again in the boom years of the latter 1990s. Sure: Productivity drives economic growth. But that isn't the whole story. Economic growth also drives productivity.

Apparently, the state of the economy affects our ability to use technological advance to improve productivity. The Great Depression, for example, was a time when improved technology failed to feed into productivity and growth; in a footnote, Greenspan says:

In contrast to the boom in productivity after World War I, which many economists associate with a few key innovations, analysts usually ascribe the post-World War II boom to innovations in many sectors reflecting the diffusion through the private economy of (a) new technologies that appeared in the 1930s but were not fully implemented during the Depression, and (b) a gradual application to civilian activities of military-related innovations.

"New technologies that appeared in the 1930s but were not fully implemented during the Depression". So it seems that two things are true:

1. Improved productivity leads to an improved economy; and
2. A declining economy leads to declining productivity.

How can this be? If productivity is pushing the economy upward, how can the economy be pushing productivity down? Obviously there is more to the story. If productivity pushing the economy upward meets resistance, it is likely that something else is pushing the economy down, offsetting or undermining the effects of improved productivity.

Greenspan says lower costs are associated with improved productivity: "On a consolidated basis for the corporate sector as a whole, lowered costs are generally associated with increased output per hour."

I say that higher costs are associated with declining productivity.

Excessive financial cost pushes our economy down. It pushes productivity down.

Jimmy Carter on the Colbert Report: the Bible says you don't charge interest to a poor person

You probably knew that.

At this site I found a couple good quotes. This (Deuteronomy 23:19-20 ESV):

“You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest. You may charge a foreigner interest, but you may not charge your brother interest...

That's pretty direct. And this one (Proverbs 28:8 ESV):

Whoever multiplies his wealth by interest and profit gathers it for him who is generous to the poor.

which sounds like moral justification for progressive taxation.

The relation between productivity and growth

From Why Have the Dynamics of Labor Productivity Changed? (PDF, 26 pages) by Willem Van Zandweghe, an economist at the Kansas City Fed:

In recent years, the U.S. economy has undergone a change in the behavior of productivity over the business cycle. Until the mid-1980s, productivity growth rose and fell with output growth. But since then the relationship between these two variables has weakened, and they have even moved in different directions.

Thought I'd take a look at that. Here are "percent change from year ago" patterns for inflation-adjusted GDP and Total Factor Productivity at constant prices:

Graph #1: Growth Rates of RGDP (blue) and TFP (not blue)

Wait a minute... RGDP is quarterly, TFP is annual. That makes the blue line more jiggy. It throws off the comparison. I can't make TFP quarterly, but I can show RGDP as annual values:

Graph #2: Annual-to-Annual, Growth Rates, RGDP (blue) and TFP

Wow. That's better. The similarity really stands out now. But I don't know about what Willem Van Zandweghe said. It's pretty easy to see productivity growth rising and falling with output growth. It's not so easy to see a change in that pattern since the mid-1980s.

Hey! I know what to do:

Subtract from Series A the average value of Series A, and then divide by the standard deviation for Series A, and then multiply by the standard deviation for Series B, and then add the average value of Series B.

I used OpenOffice Calc on data from 1951 thru 2011 to figure the average and standard deviation values:

Then I retrieved Graph #2 and plugged in the numbers. Not bad. I got a couple "mismatched parentheses" errors along the way, but FRED and I survived the ordeal. Here's the Christensen-fitted comparison graph:

Graph #3: The blue line (RGDP) Christensen-Fitted to the not-quite-red TFP line

The two lines are a close match. At a glance, they move up and down together. And I don't see any movement in different directions since the mid-1980s. So I don't know what Willem Van Zandweghe was talking about.

Okay -- next, I subtracted the Total Factor Productivity number from the fitted RGDP. Just by inspection, I don't see any obvious errors in it; I think the new FRED is coming around. As for the graph itself:

Graph #4: Christensen-Fitted RGDP less TFP

Looks like RGDP growth is declining relative to total factor productivity. Maybe that's the "different directions" thing Van Zandweghe wrote about.

What the last graph shows is that even when productivity is good, GDP growth is not as good as it used to be: Even when productivity is good, GDP growth is not as good as it used to be.


Related Posts

August 11, 2013	"the theoretical case behind NGDPT is quite weak"
August 12, 2013	dividing these series, each by its own standard deviation, will similarize the up-and-downs of the different series
August 13, 2013	He sees the size and the location of the up-and-down pattern as separate from the pattern itself.
August 14, 2013	The first step of Christensen's calculation...
August 31, 2013	some nifty stuff with averages and standard deviations, to "fit" one line to another on a graph
September 1, 2013	Christensen's Market Indicator has already been used as proof and disproof, and I'm still just checking the arithmetic.
September 2, 2013	Lars's numbers are ridiculously large and obviously in error.
March 18, 2014	FRED must use a calculation very much like this to scale and shift the right-axis numbers, when two axes are used on a graph.

The Boom of the 1990s

NBER presents U.S. Monetary Policy During the 1990s, Matt Nesvisky's review of Greg Mankiw's review of, well, of U.S. monetary policy in the 1990s.

Mankiw notes the low volatility of inflation, growth, and joblessness. Then too, "large supply shocks were uncommon in the 1990s" , and "Good shocks in fact were more common than bad." All told, Mankiw sees in the 1990s a combination of good policy and good luck.

Here's the piece of Nesvisky's article that that gets my full attention:

Also fortuitous was the behavior of the stock market, for not only were returns high but volatility was low, making the 1990s essentially the best time ever to be investing in Wall Street. Little evidence suggests the booming market played a large, independent role in monetary policy. Yet significantly, the bull market of the period preceded the acceleration of the productivity rate by several years, and the market can be a driving force of the business cycle.

"The bull market preceded the acceleration of the productivity rate by several years."

I went right away to FRED -- it seems to be okay when calculations of series data are not involved -- for a look at Dow Jones and S&P rate-of-change rates:

Graph #1: Stock Market Index Growth Rates

The thin vertical line between 1990 and 2000 is not a recession, but a date selector related to the date and market index values just at the start of the large increase which, to me, looks like the start of the bull market of the 1990s. That large increase occurs in 1995.

But that's not "several years" before the acceleration of the productivity rate! What was Mankiw thinking???

Dean Baker and John Schmitt describe a "nine-year 1996-2004 boom" in productivity. Bill C at Twenty-Cent Paradigms presents his own estimate and that of the Economic Report of the President; both show the boom beginning in 1996. In a 2002 paper, Robert J. Gordon refers to "The 1995-2000 productivity growth revival". These sources all place the start of the productivity boom in 1995 or '96 -- the same year or the year immediately following the 1995 date I have identified as the start of the 1990s bull market. In contrast to Mankiw's "several years".

Perhaps I have the bull market date wrong? No. The San Fransisco Fed's Dr. Econ (February 2001) offers this graph showing the bullish increase beginning in the fifth year after 1990 -- that is, in 1995:

Graph #2: The bull market of the 1990s (red) begins in1995

According to Matt Nesvisky, Greg Mankiw places the start of the bull market several years before the start of the productivity boom. According to me, Greg Mankiw is not correct.

But if you're looking for something that "preceded the acceleration of the productivity rate by several years" I've got a contender for you. It's my latest version of the debt-per-dollar ratio -- base-to-debt this time. I first presented it on 23 March in relation to potential GDP. I offer it again now in contrast the the bull market story of Greg Mankiw.

Graph #3: Base Money Relative to Total Debt (red) and Stock Market Measures

This graph is similar to Graph #1. I had to recreate it once due to my own lack of foresight, and a second time because FRED destroyed the graph after I tried to save it as a PDF. But I have the same three market series as before, percent change from year ago, left axis. And I've added the bolder red line, AMBSL base money divided by TCMDO debt, with the "percent change from year ago" transformation.

On Graph #3 you can see a tall, wide increase in base relative to total debt. It begins around 1990 and lasts into the mid-1990s. This burst of money growth (in a time of reduced debt growth) does in fact occur "several years" before the start of the stock market and productivity booms of the 1990s. In fact, the lines cross in the mid-1990s: the red base-to-debt line falling just as the market indices get a good uptrend going.

Here's the link. But FRED can't get the dates right.

Zoho: Debt, Growth, and Inflation

Dunno what I searched for, but it led me to an old (2012) Joe Weisenthal post with a really good name -- There's Only One Way To Fix The Deficit — And Actually It's Totally Painless. After some painful preliminaries, Weisenthal says

the primary driver of deficits is a lack of growth.

I agree.

Weisenthal's post is too long and shows too many graphs, as if he thinks his staying-power is enough to convince the reader. Ha. But he does get around to saying this:

Sadly, achieving growth is not trivial. So although it's the only meaningful solution to the deficit, there isn't agreement on the magic answer to get there.

The magic answer, of course, is to reduce private sector debt. But Weisenthal insists on writing about the Federal debt.


The same search led me to an old (again, 2012) Fictional Reserve Barking post, Evsey Domar's "On Deficits and Debt": A survival guide for making sense of today's economic challenges. Circuit writes:

Specifically, in his paper, Domar demonstrated that, in the long run, the ratio of debt to GDP will gradually approach the ratio of the fraction of GDP borrowed each year to the rate of growth of GDP. So, for instance, the US federal government borrowed approximately 7 percent of GDP in 2012. If the borrowing continued at the same rate and the GDP (in money terms) grows at 2 percent per year, the ratio of debt to GDP will approach 3.5; with a 3 percent growth, it will be 2.3.

Thus, Domar showed that "less attention should be devoted to the problem of the debt and more to finding ways of achieving a growing national income" (1945:415)

I totally agree with the focus on growing national income. And it ties in nicely with Weisenthal's focus on growth. But it's Circuit's first paragraph that gets my attention: the long run, the ratio of debt to GDP, borrowing 7% of GDP annually, and 2% GDP growth. These are things I can do in a spreadsheet.

I can test to see whether the ratio of debt to GDP approaches 3.5 with 7% deficits and 2% growth, and approaches 2.3 with growth at 3% like Circuit says. Running a test like that is not a mathematical "proof" but it helps make the results real for me, and that's worth a lot.

In the Zoho spreadsheet below, you can enter numbers in the yellow cells and watch the graph change after the thing recalculates. If you mess up the sheet, you can fix it by refreshing the page.

The default settings match Circuit's example. The 7 in yellow cell A2 represents Federal deficits each year equal to 7 percent of GDP. And the 2 in yellow cell A3 represents GDP growth of 2 percent per year.

Circuit says "in money terms". Not sure what he means by that. I think he means "nominal" but based on Circuit's presentation, I think Domar must have been talking about "real" (not inflating) growth. Inflation would change the value of the long-run ratio. As Weisenthal says:

nominal growth is all you need to reduce our debt burdens.

If real growth is 2% and inflation is another 2%, nominal GDP growth is 4%. Existing debt shrinks faster relative to GDP if GDP is inflating.

So I added a third yellow cell, cell A4, to hold the rate of inflation. The default value is zero, no inflation; therefore the red line that represents eroded debt is hidden by the blue line which does not consider inflation. Click cell A4, type the number 2 (for 2% inflation) and press the ENTER key to see the erosion of debt that Weisenthal is talking about.

Try higher GDP growth rates also, to see how better growth reduces the debt/GDP ratio. If it looks like the blue line didn't move much, it may be because the numbers changed on the vertical axis.

Give the graph a moment to refresh after you make a change.



Check me on the "Eroded Debt" calculation.

AMBSL/TCMDO and GDPPOT

Graph #1: Growth Rates, Potential GDP (red) and Base Money as a Percent of Total Debt

The blue line is generally well below zero for most of the years shown. That is, the growth of base money was consistently slower than the growth of total (public and private) debt.

The red line generally trends downward. In other words, the potential in potential output diminishes over time.

The one remarkable, large and sustained, actual increase in base-relative-to-debt occurs on the blue line between 1989 and 1996. In the midst of that increase, potential output turns and trends upward for a decade. This is a significant change in the pattern of decline shown by potential output.

The only other significant change in the decline of potential output is the uptrend that occurs between 1955 and 1967. Remarkably, this trend corresponds even more clearly to an uptrend in the base-to debt ratio.

Conditions were different in the 1990s and the 1950s. The changes in the blue line look different on the graph. But both periods show uptrend in the base/debt ratio. And both show uptrend in potential output.

If you think we need better growth, look at money and total debt.

It works about as well as everything else the Fed does

I think the new FRED goes astray as soon as you get an error while entering the formula. Unfortunately, if you want to type a-b you have to type the "-b" really fast. Otherwise, in the fraction of a second between typing the "-" and the "b" FRED will give you an error. That's not something new; the old FRED was a pain in the ass that way, too. But with the new FRED, after you get the error message everything falls apart.

I managed to "add data series" for total debt, and the federal portion, and the state-and-local government portion, all without error. The graph all the while showed the first series correctly.

Then by typing "-b" really fast, taking time to position my fingers, and typing "-c" really fast, I got the formula to be "a-b-c" without getting an error message. And the graph actually showed something that matched the formula.

I was trying to duplicate the U.S. debt portion of Steve Keen's "Change in Private Debt" graph that I showed yesterday -- change in private debt as a percent of GDP. So next I added GDP as series d. (FRED identifies the series by letter; the first one you select is "a", the next is "b" and like that.)

But now I had to change the formula to read "(a-b-c)/d". Here's where I made my big mistake. I used the backspace to delete the formula, and before I could type the "(" FRED gave me an error message. It was all downhill from there.

I ignored the error message and entered the correct formula. Amazingly, the graph looked okay. But Keen's graph shows change in debt relative to GDP. So I went back to the a, b, and c data (my three debt measures) and changed the units from "Billions of dollars" to "Change, Billions of Dollars". I just changed the three debt series, not the GDP series.

But when I looked back at the graph, it had figured "Change, Billions of dollars" for all four series, including GDP. The graph was all spikey and obviously not like Keen's graph.

From there, things only got worse. I removed the "-d" from the formula and clicked "apply". The graph changed correctly. Then I added "-d" to the formula and clicked "apply" again. But the graph didn't change. Even though the formula shows "(a-b-c)/d", the graph and the graph borders show only "(a-b-c)".

What else did I do? Oh yeah, I clicked "max" up at the top, above the graph, to set the date range. And FRED set the date range, all right. It set the start date equal to the end date. But the graph didn't change!

But, hey: That was on the 20th. Maybe it's all fixed by now.

Getting it

I saw one of those build-a-story things on the internet the other day. You know -- read what everyone else has written, and add a sentence to build the tale.

I think stories get told like that on serious blogs, too: economic and political blogs. It's like building a meem. (I'm spelling it "meem" from now on, by the way.)

You know, I don't like those stories. Not when it comes to politics and the economy. These things affect people's lives. We need something better than just good stories. We need the stories to be right.

//

You got this from me. I got it from Tom Hickey. Tom got it from Mark Buchanan.

"A picture makes it clear", Buchanan says: "the recession IS over". He presents

a graph showing that the level of private debt — an indicator of how much businesses and individuals are borrowing—is now going up again after a long decrease during the recent crisis.

It's a little funny... Buchanan thinks the level of private debt is "an indicator of how much businesses and individuals are borrowing". I think the level of private debt is a measure of how much we have borrowed in total (and not repaid). It's the changes in that level that show whether people are borrowing. It's like "present tense" versus "past tense".

Anyway, Buchanan got it from Steve Keen:

Figure 1: Deleveraging is over -- for the time being

Referring to that graph, Keen writes:

The period of private sector deleveraging that caused the crisis appears to be over. Debt is now not merely growing, but growing faster than GDP...

Looks right to me.

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Keen's post is dated 10 March 2014. In a post dated 9 July 2013, Nick Rowe wrote

If you look at business cycles this way, as a trade cycle, in which the volume of trade rises in booms and falls in recessions, it is totally unsurprising that the volume of borrowing and lending should also rise in booms and fall in recessions...

What would be surprising and in need of explanation would be if trade in IOUs did not follow the same cyclical pattern as trade in other goods.

Neil Irwin tells me that trade in IOUs is increasing in the US. (HT Mark Thoma). He's right that it's good news.

Nick Rowe got it from Marc Thoma. Marc Thoma got it from Neil Irwin.

//

Okay. Let's put a date on the "taper". From the Financial Times Lexicon:

"Taper talk" started in June 2013 when speculation increased that the Fed would start on a tapered end to QE in 2014. The increase in bond yields had already inflicted heavy losses on bond investors.

So, June. A month before Rowe and Thoma and Irwin. I think I know where Irwin got it. Irwin got it from the Fed.

But where'd the Fed get it?

Hmmm...

They updated Potential GDP last month

Real Potential Gross Domestic Product (GDPPOT) is now given in 2009 dollars. Before the February 4, 2014 revision it was given in 2005 dollars.

A lot of other series, including Real Gross Domestic Product (GDPC1), changed to 2009 dollars back in July of last year. Potential GDP has finally caught up, so now Real GDP and Potential GDP are directly comparable at FRED again.

Graph #1: Real (blue) and Potential (red) GDP, in 2009 Dollars

Here's how the two series looked, using the older data expressed in 2005 dollars:

Graph #2: Real (blue) and Potential (red) GDP, in 2005 Dollars

Not a lot of difference. The output gap there after 2008 closes a little more with the newer data. But not as much as I expected in a previous post. Why?

The "comprehensive revision" that changed Real GDP after the 2013-06-26 release didn't only change the base year from 2005 to 2009. It also increased the output numbers. It made Real GDP bigger than it was before. (Nice trick, huh?) So then, Potential GDP also had to be revised upward, to match the change in Real GDP. I didn't account for this change in Potential GDP. So the output gap doesn't close as much as I said it would, in that earlier post.


In order to compare the two versions of the output gap, I subtracted Real GDP from Potential GDP using the 2005-dollar data, and again using the 2009-dollar data, and put the results together on a new graph. Over the full period, the two "difference" lines run quite close together, as you might expect. So I zoomed in on a detail -- just the years since 2007:

Graph #3: The Output Gap using Old (blue) and New (red) data

The main thing you can see on this graph is that since 2009, the output gap gets smaller faster for the new (red) data than for the older (blue) numbers. That is what you have to expect, given CBO policy that reduces any output gap to zero in ten years:

CBO: A Summary of Alternative Methods for Estimating Potential GDP (PDF)

The surprising thing you can see on the graph is that, since 2007 or before, the new numbers show a bigger output gap than the old numbers. Not a lot bigger, but bigger. That's surprising, because Jim Bullard's argument was that Potential Output was over-estimated in the 2000s. Bullard's argument was that potential output was lower than people thought, that GDP was above potential, and that the shocking fall in Real GDP was really just a correction.

Now, it seems, they get to have it both ways: The output gap was bigger than people thought, but it's closing faster anyway.