August 09, 2003

Productivity Growth Trends

The Economist focuses on this past quarter's productivity growth number, without taking a look at the larger picture:

Economist.com: Output has dipped and climbed, but has the trend rate of growth risen? Economists are still far from a consensus.... When the productivity figures did pick up in the second half of the 1990s, all of the assorted gurus, bulls and nerds claimed vindication. Even Mr Greenspan became a cheerleader for the new economy, albeit a rather taciturn and oblique one.

The cheers faded as the stockmarket bubble burst and the economy went into recession. But the collapse in share prices does not itself disprove the notion of a new economy. The bears can be right without the nerds being wrong, because technological revolutions do not always pay off for the people who bought stocks in them. The railroad investors of the late 19th century, for example, made no money from their stakes in America's rail companies, but most agree that the economy as a whole benefited. Productivity gains can be real, without showing up in your dividend payments. The gains might go to workers, in the form of higher wages, or they might show up in the creation of new companies rather than new profits for old companies.

If the bear market and the recession do not refute the productivity optimists, Thursday's productivity announcement does not vindicate them either. Quarterly productivity measurements tend to jump about over the course of the cycle, because employment always lags behind output. Firms are slow to fire workers when sales fall--leading to declines in measured productivity--and they are equally hesitant to hire workers as sales start rising--leading to big gains in productivity at the start of a recovery. As Robert Gordon, a professor at Northwestern University, points out, the recoveries of early 1975, late 1982 and early 1991 were all accompanied by dramatic surges in productivity that quickly petered out over the subsequent two years...

The figure below plots the quarter-by-quarter productivity growth numbers since 1970, alongside a centered eight-quarter moving average. Yes, the quarter-by-quarter numbers do jump around. Yes, the early stages of a business cycle recovery are often times of unsustainably high productivity growth--following a period of abnormally low productivity growth as firms hoard labor during the recession.

But this business cycle has been different. There was no sustained decline in productivity growth during the recession--there was little if any labor hoarding, and thus little slack of employed-but-underutilized labor to fuel rapid productivity growth numbers as the recovery begins. But it is very hard to look at the figure and think that we are still in the long productivity-growth slowdown period that began in the mid-1970s. The rapid productivity growth of the quarter just past is a small piece of evidence that trend productivity growth has accelerated. But there are a lot of other pieces of evidence as well. Posted by DeLong at August 9, 2003 08:48 PM | TrackBack

Comments

Productivity is growing at a fine pace and there is simply no reason to expect a slowing soon. Variations of Moore's law and smarter business application of technology and organization have been driving productivity growth since 1994. The problem is generating enough demand to produce the employment pattern we found after 1994. This will be hard for the Fed has little room for more stimulus and the tax cuts have been to far less middle class advantage than should have been the case. Again, we are dealing with global supply chains that have added to capacity beyond the growth in world demand.

Posted by: anne on August 10, 2003 07:59 AM

Brad DeLong

Paul Krugram has added to the post on Treasury Department distortions on the effects of the series of tax cuts:

http://www.wws.princeton.edu/~pkrugman/theygo.html

This is indeed a serious matter.

Posted by: anne on August 10, 2003 08:10 AM

This is the "New Productivity Paradox."

We are confronting the dark side of productivity: Companies need less laborers to produce more goods and services; Less workers means less consumer spending, lowered tax receipts, weaker corporate profits -- a not-too-virtuous cycle. Consider:

-Since 1995, labor force productivity has been increasing at least 2.25% per year, double the annual rate of the previous two decades.

-At the same time, the labor force itself is growing at ~1.3% per year.

-Real GDP has to increase at 3.5% per year just for the economy not to hemorrhage any more jobs.

One of two things will needs to occur for job growth: Either GDP must improve dramatically, or productivity gains must tail off, if not reverse. If neither of these events occur, the U.S. could continue to lose jobs at a disturbing rate.

Posted by: Barry Ritholtz on August 10, 2003 08:20 AM

"Variations of Moore's law and smarter business application of technology and organization have been driving productivity growth since 1994."

1994?

http://www.j-bradford-delong.net/movable_type/archives/000281.html

These things have been disruptive for a mighty long time. For better or worse the disruption is a constant.

Posted by: Ben on August 10, 2003 11:34 AM

1) DeLong's chart is illuminating, and shows pretty clearly how different the current productivity increases since the start of 2001's recession have been compared to the past.

2) It would have helped, though, to note that these ICT breakthroughs since the early 1970s ---the years when DeLong's chart start --- reflect what is very likely to be a Schumpeterian long-wave of clustered revolutionary technologies that have a radically restructuring impact on the economy: they create entirely new industries with constant spillovers, alter the ways existing businesses operate, transform where and how we work (think of the switch from agriculture to urban-factories and later office-buildings in England in the first half of the 19th century), and --- as with electrification and automobiles in the first three or four decades of the 20th century --- change noticeably our leisure habits too. On the latter score, think too of airplanes, mass tourism, movies, TV, VCR's and so on.

For Schumpeter's views of long-wave revolutionary technologies, see the article on this at the buggy prof site, http://www.thebuggyprofessor.org/archives/00000098.php

3) Revolutionary waves of such radically restructuring technologies occur, Schumpeter argued, every 50-60 years. Generally, assuming we can still pin down an industrial revolution starting in the 1770s or so, that seems to be the case. First, textiles and steam engines until 1830 or so. Then railroads and steamships until the 1880s. Then electriciation and the internal combustion engine --- plus mass production and chain-line assembly (Ford, Taylorism) --- from the 1880s until 1930 or so. Then the beginning, despite the Depression and WWII, of airplane travel, mass tourism, the modern entertainment media (radio and movies first), big breakthroughs in agricultural production, installment credit, and synthetics from roughly the 1930s until the 1970s or so. And more recently information and communication technologies, with their transforming impact, starting in the 1970s, followed by bio-tech and now --- in the same wave of clustered innovations --- nanotechnology. Maybe eventually new exotic fuels to replace carbon-based one.

4) Diffusing and absorbing these new technologies do take time. Paul David of Stanford showed in a path-breaking study that it took three or four decades for the majority of American industries to electrify; and he speculated that there is likely to be something like a need for a 50% penetration of an industry by the new technology or technologies before it has its revolutionary impact. Lots of learning is also involved. The more technologically demanding --- as with, say, learning how to use computers by the public has been starting in the 1980s --- the longer the learning curve might be. Hence if the new ICT breakthroughs began in the 1970s, it's no surprise they didn't show up in the productivity stats until a quarter of a century had lapsed. (Even then, only about 30% of American businesses were engaged in business-to-business e-commerce on the Internet before the ICT investment boom and the related dot.com extravaganzas in the stock market crashed in 2000.)

5) A political scientist, I'm naturally interested above all in the impact of new revolutionary technologies on the distribution of global power and, among other things, on warfare and on what we call "soft power" --- roughly the influence and prestige that accrue to an innovating country in world affairs. See mini-series, about 6 articles, on the revolution in warfare that the buggy prof site published in the period of the recent Iraqi war. For the first article, see http://www.thebuggyprofessor.org/archives/00000059.php The others in the series can be accessed by clicking on the archives-link to "American Foreign Policy." (Note though that my site was knocked out by a hacker on July 1st and was down for two weeks; some of the archives are still jumbled, I fear . . . though the ones dealing with US foreign policy seem more or less in order.)

6) As for the Economist article DeLong cites, it seems superficial and ignorant of these wider historical matters . . . and of the time-series that Brad plots in his chart.

More to the point, the article seems unduly pessimistic by a long-chalk when it comes to the immediate prospects of the US economy. No mention is made, for instance, of almost unbroken good news about the economy's recent performance since early spring --- including a big spurt of growth in the service sector (75-80% of the US economy after all), a big increase in business investment being reported the last two weeks, the recovery of consumer confidence, and the good news about GDP growth in the spring quarter, albeit on a preliminary BEA estimate.

The big exception, of course, is the job market. Even then, however, there's some promising news, above all that the growth of unemployment has finally stabilized, and there's been a noticeable decline the last month of first-time unemployed registering for compensation.

That said, we all seem to agree that with the big increase in productivity, there is a need for a large increase in aggregate demand --- private consumption, business investment, government spending, (plus any reduction in the current account) --- for businesses to start hiring back laid-off workers and new jobs to be created. Again, if you want, see the four-article mini-series on this at http://www.thebuggyprofessor.org . . . the latest published on July 26th, with one more article to come.

7) Couple of other comments, hastily tossed out:

First, DeLong's chart refers to labor productivity, and rightly so. Still, we should also be concerned with TFP --- total factor productivity, which (as the residue in growth-accounting equations) is normally interpreted to be equivalent to technological progress in a broad sense: not just new knowledge embedded in new or better machines, but also new knowledge about more effectively organizing and managing business firms and public agencies . . . including, for business firms, better marketing.

Future studies of TFP in the period since 2000 will help sort out how much the productivity gain since the ballooning stock market crash has been due to business firms squeezing out more output from their existing work-force --- or the same output with fewer workers --- as opposed to technological advances in this broad manner. (And as always in the debates between Solow neo-classical growth theory and endogenous new growth theory, there's liable to remain a big controversy as to how much of annual GDP is due to improved TFP as opposed to improved labor force quality.)


Second, nobody in these forums has seemed to note how a big imbalance in the global economy is hurting the US recovery. In particular, every other major country or region (China, Japan, the rest of Pacific Asia, and the EU) is oriented toward export-led growth . . . which means they are waiting on the US economy to recover in order for themselves to grow by big exports to us.


In the early 1980s, for instance, the Reagan-led recovery and big US trade deficits accounted for close to 50% of the recovery of Japan and Germany in those days. Two decades later, what's changed? Little on this score, it seems. And as this imbalance remains, short-term aggregate demand in the US will continue being drained off by the ever swelling current account deficit --- especially in the trade in goods.

China is an especially big short-term problem for the US. (Whether China's published GDP figures the last few years are remotely accurate remains a big question mark. I add. Even the former prime minister, Zhu Rongji publicly doubted them.) Specifically, unlike Japan --- where the Ministry of Finance, despite accumulating huge amount of dollars by selling Yen, has been unable to keep the Yen from appreciating by about 7% since the spring of 2002 (something that shows up as a big reduction in the bilateral trade defict with us) --- the Chinese government has kept the Yuan fixed at 8.3 to the dollar, spending about $300 million worth of Yuan daily to keep it pegged at that rate. This is a form, it appears, of begger-my-neighbor policy, putting enormous pressure on certain industries in the US.

What to do about it? For my own views, see the article on "China: Short-Term Problem for the US, a Long-Term Promise" at the buggy site.

-- Michael Gordon
The buggy prof

Posted by: michael gordon on August 10, 2003 02:13 PM

Let me ask some questions.

If a factory producing cars starts receiving parts from another factory overseas, and starts assembling them it's going to produce more cars per time period, right? Has its' MEASURED productivity gone up in the BLS report?

If workers work unpaid (and therefor) unreported overtime - is that going to increase productivity?

Is unreported/unpaid overtime more likely to occur in a bad economy?

As workers are laid off, are the more unproductive workers likely to be laid off first, therefore boosting productivity numbers?

When jobs are being moved overseas, are they more likely to be moved if they are low productivity jobs - since moving them overseas will allow for lower labor costs and therefore is more likely to meat minimum ROI limits?

And are more labor intensive (as opposed to capital intensive) jobs more likely to be moved overseas - since the more labor intensive they are the larger the savings of going to low cost environs? And aren't labor intensive jobs generally the ones with lower productivity ratios?

Posted by: Ian Welsh on August 10, 2003 02:58 PM

Can someone clarify whether or not railroad investors made out with their investments or not? That they did not runs contrary to what I have been led to believe, but I would welcome more information. Thanks.

Update: After googling a little I came across an article in wired by none other than Brad Delong:
http://www.wired.com/wired/archive/11.04/view.html?pg=5

It would seem that British investors got taken, which could be reconciled by my understanding that the owners of the railroads had a very sweet deal.

Posted by: theCoach on August 10, 2003 07:02 PM

"the tax cuts have been to far less middle class advantage than should have been the case."

http://online.wsj.com/article/0,,SB106054926445017500,00.html

---
Corporate chiefs will reap millions in after-tax gains from the federal tax cut. The measure, which cut the tax on dividends and prompted many companies to boost payouts, is a boon for executives holding sizable stakes in their firms.


"Again, we are dealing with global supply chains that have added to capacity beyond the growth in world demand."

http://www.cm1.prusec.com/yararch.nsf/(Files)/a_080503.pdf/$file/a_080503.pdf

---
While I remain bullish about the outlook for the rest of this year, I am starting to wonder about the prospects for next year. More fiscal stimulus is likely to continue boosting economic growth through the first half of 2004. Many taxpayers will receive tax refunds for the retroactive reduction in marginal income tax rates for the first half of this year. The question is whether fiscal stimulus will trigger a self-sustaining "multiplier effect" over the second half of next year. I believe it will, but I do have some doubts.

One of my concerns is that the multiplier effect might be less effective than in the past because non-oil merchandise imports now account for 28% of goods sold in the United States, up 18% ten years ago. In other words, a significant portion of both monetary and fiscal stimulus is now stimulating demand for foreign-produced goods rather than domestically produced ones. Over the past 12 months through May, U.S. imports of manufactured goods are up 6.8%, while manufacturing shipments are little changed. This development may also explain why the current cyclical upturns in both inventories and employment have been subpar so far. Just-in-time world-wide transportation systems reduced the need for retail and wholesale inventories. If more goods are produced overseas, domestic inventories of raw materials, supplies, and work-in-process must be lower than if the goods were produced in the United States. Obviously, these trends are likely to have an adverse impact on production and employment.

Posted by: CocaCloaca on August 11, 2003 07:12 AM

"the tax cuts have been to far less middle class advantage than should have been the case."

http://online.wsj.com/article/0,,SB106054926445017500,00.html

---
Corporate chiefs will reap millions in after-tax gains from the federal tax cut. The measure, which cut the tax on dividends and prompted many companies to boost payouts, is a boon for executives holding sizable stakes in their firms.


"Again, we are dealing with global supply chains that have added to capacity beyond the growth in world demand."

http://www.cm1.prusec.com/yararch.nsf/(Files)/a_080503.pdf/$file/a_080503.pdf

---
While I remain bullish about the outlook for the rest of this year, I am starting to wonder about the prospects for next year. More fiscal stimulus is likely to continue boosting economic growth through the first half of 2004. Many taxpayers will receive tax refunds for the retroactive reduction in marginal income tax rates for the first half of this year. The question is whether fiscal stimulus will trigger a self-sustaining "multiplier effect" over the second half of next year. I believe it will, but I do have some doubts.

One of my concerns is that the multiplier effect might be less effective than in the past because non-oil merchandise imports now account for 28% of goods sold in the United States, up 18% ten years ago. In other words, a significant portion of both monetary and fiscal stimulus is now stimulating demand for foreign-produced goods rather than domestically produced ones. Over the past 12 months through May, U.S. imports of manufactured goods are up 6.8%, while manufacturing shipments are little changed. This development may also explain why the current cyclical upturns in both inventories and employment have been subpar so far. Just-in-time world-wide transportation systems reduced the need for retail and wholesale inventories. If more goods are produced overseas, domestic inventories of raw materials, supplies, and work-in-process must be lower than if the goods were produced in the United States. Obviously, these trends are likely to have an adverse impact on production and employment.

Posted by: CocaCloaca on August 11, 2003 07:15 AM

This isn't a comment on economy-wide productivity, but it's a fascinating fact I heard on 60 Minutes last night.

A guy in the orchid business, who sells primarily to Home Depot, was commenting on how the orchids one can now buy at Home Depot for $20, would have cost 20 times that much ($400) only a decade or 2 ago. I think the 60 Minutes piece attributed it to cloning technology.

Leslie Stahl asked, "So there's no difference between these $20 orchids at Home Depot, and ones costing $400 a decade or two ago?"

The guy responded, "Well, actually, these Home Depot orchids are better. Bigger blooms. More sturdy stems."

A factor of 20 reduction in cost, for a *better* product, in just a decade or two. And it's not even a computer part, but instead comes from a miracle of biotechnology. Pretty danged amazing.

Posted by: Mark Bahner on August 11, 2003 09:18 AM
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