June 04, 2003

Note: Productivity Over the Cycle

Reasonably healthy productivity growth in the first quarter...

Productivity revised higher in 1Q - Jun. 4, 2003: U.S. non-farm productivity climbed 1.9 percent in the first three months of the year, the Labor Department said, an upward revision from the previously reported 1.6 percent gain.

Posted by DeLong at June 4, 2003 06:52 AM | TrackBack


The wheels of overproduction just keep on spinning. The US Labor Department announced today that nonfarm business productivity ticked up 1.9% annualized in 2003:I. At the same time, a much less reported figure -- real hourly compensation -- actually fell in 2003:I by 0.4% annualized. So we have more production in the national engine of the global economy and yet less wages to soak up the stuff.

In an influential 1997 article in the journal Foreign Affairs, Paul Krugman (when he was still obnoxious as hell) ridiculed the general glut argument with a single claim: that wages always rise with productivity and so there will always be income generated by production to consume the goods and services produced. Krugman offered no substantial evidence for this relationship save neo-classical economic religion and mantra (Nam-Myoho-Renge-Kyo will work just as well). Well, the General, being the contrarian he is, crunched some more numbers for you and found that since 1970, US productivity has risen 79% but real hourly compensation has risen just 40%. In fact, real hourly compensation has been completely stagnant since 2000, just as it was throughout the Clinton 'jobless recovery' years.

How do Americans then buy all this stuff? Credit and ultra-cheap imports. This is why interest rates and the value of the dollar are central to telling any story about the global economy today. Americans are being subsidized to the hilt by US banks and by the rest of the world to keep up their destructive consumption habits and thus keep the house of cards from falling. But this process is unsustainable, and the house of cards will have to come down, perhaps later rather than sooner. Production can outrun consumption only so long before General Glut has his unhappy revenge.

Posted by: General Glut on June 4, 2003 08:03 AM

It will be informative to see how personal savings changes with the latest tax cut. After the last one, personal savings went up to match -- and a relatively constant level of personal outflows indicated most of the extra money (which actually went to the upper-middle class and upper-classes) was not spent.

Of course, Bush keeps hyping the idea that when people have more money to "spend or save", the economy will improve. I'm pretty sure he's wrong about that, at least as regards saving stimulating the economy.

Posted by: Jonathan on June 4, 2003 08:31 AM

"most of the extra money (which actually went to the upper-middle class and upper-classes) was not spent."

This should be obvious to the most casual observer. If you put more money in the hands of those folks who can already afford to buy whatever they want, they will save it.

Posted by: Chuck Nolan on June 4, 2003 09:26 AM

I'm probably missing something here, but if people increase their savings, they're probably putting that money into either a bank account or the market, right? Either way, they're increasing the amount of capital available for investment. And we should probably expect increased investment to increase productivity, right? And increased productivity, all other things being equal, apparently leads to decreased employment.

So are people basically putting themselves out of work by investing their money?

Posted by: Kimberley Burchett on June 4, 2003 10:17 AM

The question is whether demand is rising fast enough to increase employment. If GDP is growing at 3% and productivity is growing at 3%, there is no need for more employment. Will the stimulus of the tax cut and low interest rate re-financings spur demand enough for GDP to grow beyond the growth in productivity.

Posted by: anne on June 4, 2003 10:34 AM

What is the effect if the extra money is used to rise share price?


Posted by: Antoni Jaume on June 4, 2003 10:35 AM


It may be a bit more complicated than that. Greenspan was, at one point, unhappy with the available data on spending by households - too little information on which households were spending. He made a suggestion to Fed staff on combining data bases to get the information he wanted (this is a vague remembrance, so don't trust me too much here). The result was research which showed a big impact on spending by the wealthiest households from changes in stock values, far less (big surprise) among the less wealthy. The implication, as far as I can tell, is that the rich are as prone to spend a windfall as anybody else, if their wealth is growing at an acceptable pace. They can afford to save, so they will, if their wealth is not growing at an acceptable pace. The problem with relying on the wealthy to spend us out of a demand slump may be timing. Their behavior may be more pro-cyclical than the rest of us. Brad would know more about that than I....


I think the notion is that productivity raises the marginal product of workers (see the comment from General Glut) so that either they are paid more or more are hired, or a little of both ... as long as margins are high. If not, then high productivity growth allows shedding of workers to boost margins. So rapid productivity growth cuts both ways for workers, but is always good for somebody. Since we are in expansion more often than recession, there is every reason to think productivity gains are a net gain for workers over time.

Posted by: K Harris on June 4, 2003 10:47 AM

K. Harris,

the definition of a demand slump is that only the rich could afford to keep on spending as usual. If they don´t, it sure won´t help to tax the poor so the rich may rethink their attitude.

Posted by: Joerg Wenck on June 4, 2003 11:02 AM

Associated Press -

"For all of 2002, productivity grew by an impressive 4.8 percent."

If productivity growth continues to be above 3%, it is hard to believe that GDP growth will be fast enough over the rest of this year to add a significant number of jobs.

Posted by: jd on June 4, 2003 11:45 AM

K. Harris,
Your theory regarding cyclical effects on wealthy spending makes sense to me...one of the main problems in a recession is typically that demand goes down both because fewer people have jobs and those that do save their cash. I see no reason why this wouldn't impact the wealthy.

The moral of the story is that 1) you want to keep people working or get them back to work and 2) if you are going to give cash to someone, make it people who have little choice but to spend it (i.e. those who are scraping by).


Posted by: Jonathan on June 4, 2003 12:10 PM


A cynics definition? I take you point, though. At least this time around, the rich seem more prone to save than to spend, because they have not felt they can adhere to the cynic's definition. The stock slump really changed their spending pattern. Housing refis, on the other hand, appear to be making demand heros of the middle class - they have picked up the baton on the slow period.

Posted by: K Harris on June 4, 2003 12:12 PM


That's absolutely true, provided that these are the only investment vehicles. Housing is one option. Federal debt is another option.

When the government runs a deficit and cuts taxes for the wealthy much of that wealth U-turns back into government as government debt. It does not get reinvested. (Crowding-out effect.)

Posted by: Saam Barrager on June 4, 2003 12:28 PM

I'm confused by the various replies on two fronts: (1) why all this talk about savings v. consumption when the post was about measured productivity (more on this later); and (2) how can anyone suggest we are saving more when both consumption and government purchases as a share of NNP have risen since 2000. In fact, my review of BEA data suggests that national savings has dropped to a mere 1% of NNP.

On productivity, I find it odd that folks look at monthly variations in real GDP relative to employment when there is no much noise in the data and when the ratio jumps from reductions in actual employment relative to what we would have at full employment. But then any short-term movement in such macroeconomic ratios can be interpreted in all sorts of ways.

Posted by: Hal McClure on June 4, 2003 12:50 PM

June 2, 2003

Stephen Roach

The United States, for its part, is guilty of perpetuating a saving-short growth dynamic that consumes an ever-larger portion of saving in the rest of the world. The latest round of multi-year government deficit spending just enacted by Washington only exacerbates this tendency; it could well take the US net national saving rate down toward zero from its record low of 1.3% in late 2002. That would increase America’s dependence on the rest of the world to finance its consumption-oriented economy — compounding an already serious balance-of-payments deficit problem.

Posted by: anne on June 4, 2003 01:03 PM

Good news, if you can believe the numbers.

The FT on productivity

The new economy may already be history - By Dean Baker

Published: June 1 2003 19:04

The core of the "new economy" has always been the sharp increase in productivity growth that began in the second half of 1995. Proponents of the new economy, led by Alan Greenspan, chairman of the Federal Reserve, have focused on this upturn in productivity growth as its defining feature. The US had a boom of investment, concentrated in information technology, which unleashed a surge in productivity growth unmatched since the 1960s.

It is therefore striking that new data, suggesting that productivity is no longer growing rapidly, have received little attention. The most recent data from the US Department of Commerce indicate that over the past year, productivity growth has fallen back to the rate of the productivity slowdown of 1973-95. If productivity continues to grow at this pace, the new economy will prove to be just a blip in a longer period of slow growth.

Mr Greenspan and other proponents of the new economy are justified in focusing on productivity growth because it is the most important factor determining living standards over the long run. If the economy could sustain a rate of productivity growth of 2.5 per cent annually - the general consensus for the new economy - living standards can double in little more than a quarter of a century. If productivity grows at the 1.5 per cent rate of the slowdown era, living standards would improve by less than 50 per cent.

While part of the explanation for the neglect of the productivity data may stem from a desire to ignore bad news, a bigger factor is that the main issue is technical in nature. In the past decade, an increasing share of the economy's output has gone to depreciation - the replacement of worn-out or obsolete equipment - as short-lived equipment (for example, computers and software) has accounted for a growing share of investment. In the past year, the share of output going for depreciation has increased by 0.8 percentage points of gross domestic product. While necessary to sustain the economy, the resources that are used to replace depreciated plant and equipment do not directly improve living standards.

If we use a net measure of output - which excludes depreciation - the increase in productivity over the past year would be approximately 1.5 per cent, just 0.2 to 0.3 percentage points above the rate of net productivity growth in the years before the arrival of the new economy. By contrast, the productivity numbers, which report gross productivity growth, showed 2.3 per cent for the last year, only slightly lower than the 2.5 per cent new economy average. But the gross productivity data conceal the fact that the share of output going to depreciation was increasing at a 0.3 percentage point annual rate in 1995. It is currently increasing at almost 0.8 per cent a year.

In short, when the recent numbers on productivity growth are adjusted for depreciation, most of the new economy upturn disappears. It remains to be seen whether the share of output going to depreciation will continue to increase at the same rate but the gross measure of productivity growth may fall as well.

Even before the latest productivity numbers, the new economy had already largely gone out of fashion. The days of ever-rising stock prices seem a distant memory. Plunging retirement plans have sent millions of older workers scurrying for part-time jobs at a point in their lives where they expected to be relaxing on the beach. The stories of oversubscribed dotcom initial public offerings have been replaced by stories of accounting fraud, as tumbling stock prices put an end to the investment boom.

The loss of more than 2m jobs in the past two years has pushed the US unemployment rate up from 4 per cent in 2000 to 6 per cent today. As the labour market has weakened, workers who still have jobs have become far less secure. One result is that the healthy growth in real wages during the boom of the late 1990s has largely evaporated. Real wages are stagnating for most workers; increases are barely keeping pace with inflation and the gap in wages between high-end and low-end workers seems to be growing again.

Even so, the upturn in productivity growth had appeared to persist into the recession and the subsequent period of slow growth. The new data indicate that this last pillar of the new economy may be collapsing. Yet the latest productivity numbers were barely mentioned in most reporting on the economy.

It is important to note that productivity numbers are highly erratic and are often revised substantially. This means that years from now, when we have more complete data, the productivity picture for this past year may appear very different from what current data show.

But, in the meantime, these data are all we have to go on. They show that the slower growth in productivity has now lasted for a full year, rather than just a single quarter. With four quarters of slow productivity growth behind us, economists such as Mr Greenspan should be asking if the new economy is history. If it is, America's economic slowdown may prove to be more persistent than many had hoped.

The writer is co-director of the Center for Economic and Policy Research in Washington, DC, http://www.cepr.net/

Posted by: Pooh on June 4, 2003 03:04 PM
Post a comment