Tuesday, August 23, 2016

BIS on the connection between Debt and Labor Productivity

At BIS, from When the financial becomes real:

Financial booms typically go hand in hand with significant resource misallocations. In particular, labour is diverted to booming sectors with relatively low future productivity growth...

The impact of these misallocations became even larger in subsequent years, once the boom turned to bust... Thus, the fallout from credit booms may well have exacerbated the trend decline in productivity growth in advanced economies. By the same token, lower productivity growth in recent years need not be permanent.

... need not be permanent. In other words, it ain't secular stagnation, it's crisis-related. And maybe, the bank is saying, maybe we shouldn't be surprised if we see an improvement in productivity in the next couple three years.

Where have you heard that before?

Also this, remarkable from a bank:

Credit expansions may still boost output growth through higher demand and investment, but not productivity growth. To gain a sense of the economic significance, consider the US experience. Between 2004 and 2007, labour productivity grew by 1.2% per year, but labour reallocations made a negative 0.3 percentage point contribution. Over the same period, private credit to GDP grew by 4.5% per year. Taking the estimates at face value, if credit to GDP had grown by only 1.5%, the drag on productivity growth would have been eliminated.

They're saying we used too much credit. BIS -- one bank to rule them all -- BIS says private credit use was excessive. BIS says private debt was excessive. BIS.

This is big.

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