Friday, August 19, 2016

Productivity and Debt Service

This graph shows productivity. I have circled the low productivity of the past few years, and also the low productivity of the 1990s in the years before "Goldilocks".

Graph #1: Productivity
When I take that graph and add household debt service to it, you can see that the circled years of low productivity are quite obviously related to the lows in debt service:

Graph #2: Productivity and Debt Service
Need I say more?


Anonymous said...

Wasn't the increase in productivity due to the personal computer and internet? How is there a causal relationship between increases in household debt and productivity?

The Arthurian said...

"Wasn't the increase in productivity due to the personal computer and internet?"

That's what Alan Greenspan said, and a lot of people.

We need not only a product or industry (like computers) but also affordability to get a burst of productivity and growth. This means in part that computers didn't "take off" until the prices came down far enough. But monetary conditions also play a role. In the early 1990s interest rates were low and debt growth had been falling for several years. So debt burdens were relatively low and people were evidently willing to increase those burdens by borrowing more. Tech was a timely target of that borrowing.

In a time with no particular timely target but relatively low debt and relatively low interest rates, the spending might have focused more on something like hula hoops... or flipping houses. So yes, I suppose the focus on computers contributed mightily to the productivity improvement. Now that you mention it.

"How is there a causal relationship between increases in household debt and productivity?"

I am using household debt as a proxy for private debt in general, as I am unable to find debt service data on private debt in general. So it is not a relation between household debt and productivity, but between debt or private-sector debt and productivity.

This FRED graph shows growth rates of household debt (red), private non-financial debt (blue) and total non-Federal debt (green). It shows that in the early 1990s the other measures fell to lower growth rates than household debt. I am led to think that the debt service measures show comparable movements.

A period of decline in debt service frees up money for spending. It makes lenders hungry. It improves the spirits of borrowers. These things lead to increased borrowing and spending. The increased spending promotes growth, and growth is highly compatible with improved productivity.

This Excel graph shows Productivity (FRED PRS85006092, quarterly) thru a Hodrick-Prescott filter (constant = 1600) and Household Debt Service (FRED TDSP, quarterly).

Debt service and productivity fall together in the early 1990s as money comes out of "malinvestment", then rise together as money goes into computers and the internet.

It is not so much a "causal" relationship, really. It is more that the fall in debt service (and the slow growth of debt) created the environment that allowed acceleration of spending on the new technology of the time.

If the monetary environment hinders or prevents an acceleration of spending, improved productivity will be difficult or impossible to achieve.