August 15, 2003

Productivity Growth

Productivity Growth: Nightly Business Report: August 18, 2003

The betting now is that the latest GDP growth number will be revised upward to a 3.0% annual growth rate. This makes everybody happy. But everybody is also unhappy: the employment news is bad: hours worked fell at a 2.2% annual rate in the spring. How can production grow yet employment fall? Because of productivity. Productivity shot ahead at a 5.7% annual rate.

Rapid productivity growth tells us that the economic news is probably going to be schizo--good news about production, but bad news about employment for quite a while. Bosses, investors, and those secure in their jobs will probably feel a healthy recovery. Those without jobs and who fear they might lose their jobs will probably feel like it's still a recession.

It is also very good long run news: it tells us that the swift pace of improvement in and adoption of high tech is continuing and is producing big benefits. In the past four years the share of American households online has risen from 33 to 59 percent. And this year in America digital cameras will outsell film-based cameras.

If only demand growth matched the growth of America's productive potential, the economic news would be very good indeed.

I'm Brad DeLong

Posted by DeLong at August 15, 2003 08:43 AM | TrackBack

Comments

This indicates to me that the coming of the "new" economy was not entirely off the mark.
We should probably discount some of the productivity number due to on average more highr productivity workers in the workforce than out, but still the productivity growth puts us well above 3.5, and should indicate that any failing to be at the correctly revised productivity number is a failing economy. In other words if we take a strong economy to mean above trend, and weak to be below, we should also be revising what 'trend' or standard growth is, because of a real shift in potential- 3% ain't all that great( simliar to being excited about a %5 mortgage rate if we went into long term negative inflation) .

Posted by: theCoach on August 15, 2003 08:54 AM

http://www.nytimes.com/2003/08/15/opinion/15KRUG.html

Twilight Zone Economics
By PAUL KRUGMAN

For about 20 months the U.S. economy has been operating in a twilight zone: growing too fast to meet the classic definition of a recession, but too slowly to meet the usual criteria for economic recovery. There's nothing particularly mysterious about our situation. But recent news coverage and commentary in particular, the enthusiastic headlines that followed a modest increase in growth and a modest decline in jobless claims suggest that some people still don't get it. So here's a brief refresher course on twilight zone Economics 101.

Since November 2001 which the National Bureau of Economic Research, in a controversial decision, has declared the end of the recession the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, but when it comes to jobs there has been no recovery at all. Nonfarm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001....

Posted by: jd on August 15, 2003 09:10 AM

Here is Larry Lindsey's view of the economy. Note that the style is the same he used in his presentations to Mr. Bush.

http://www.timesonline.co.uk/article/0,,630-758968,00.html

Posted by: bakho on August 15, 2003 09:13 AM

Given the need to increase demand, might this be the time to take steps to increase the median worker's income through tax policy (temporary FICA suspension, for example, which would also encourage employment), higher minimum wage legislation, the encouragement of labor organizing particularly in the lower paid service sector? This should increase demand and enable workers to participate in the ongoing productivity growth.

Of course, unless steps are taken to reverse the grossly flawed tax policy of the last few years and the resulting large structural deficits, I fear there will be insufficient confidence in US fiscal policy both abroad and domesically to permit a solid employment-creating economic recovery.

Posted by: Ben Brackley on August 15, 2003 10:03 AM

Brilliant post bakho; Maybe LL would still have been on the train if he had pushed that presentation style even harder?

Posted by: Mats on August 15, 2003 10:03 AM

Given the need to increase demand, might this be the time to take steps to increase the median worker's income through tax policy (temporary FICA suspension, for example, which would also encourage employment), higher minimum wage legislation, the encouragement of labor organizing particularly in the lower paid service sector? This should increase demand and enable workers to participate in the ongoing productivity growth.

Of course, unless steps are taken to reverse the grossly flawed tax policy of the last few years and the resulting large structural deficits, I fear there will be insufficient confidence in US fiscal policy both abroad and domesically to permit a solid employment-creating economic recovery.

Posted by: Ben Brackley on August 15, 2003 10:08 AM

Larry's analogy would be lot closer to reality if the engineer was chucking the coal over the side.

Posted by: Stan on August 15, 2003 10:10 AM

Paul Krugman

"All this is, of course, an indictment of our economic policy a policy that has managed the remarkable trick of generating immense budget deficits without giving the economy much stimulus. But that's a subject for another day."

http://www.nytimes.com/2003/08/15/opinion/15KRUG.html

Posted by: Fair and Balanced Dahl on August 15, 2003 10:19 AM

If only demand growth matched the growth of America's productive potential, the economic news would be very good indeed.

In the short run, I'd agree with Ben above that demand needs to be boosted, however, my question/comment pertains to the longer term:

Is there not a limit to what can be consumed? I mean, assuming first world demand could be re-invigorated and third-world demand brought to first world levels, is there not a point when no more can be consumed? It would seem to me that ever increasing productivity with eventually finite consumption spells a long run recipie for deflation, doesn't it?

I could be totally wrong here, of course, hence the question and not statement.

Posted by: Lorenzo on August 18, 2003 06:35 AM
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