Brad DeLong's Semi-Daily Journal (2004)

Are any records kept that show the productivity of government or academic workers?

Adrian

The Fed measures everything, Adrian. Go browse their exceptionally useful web sites.

In re productivity, what happens if high productivity growth continues while aggregate demand remains lower than desired? Initial claims were slightly lower-than-expected today, but I'm not entirely sure we're out of the woods on employment. I don't want to see a tightening cycle start before more people have work, especially if it coincides with post-election fiscal discipline.

"the productivity of government or academic workers?"

Do yer mean Gov workers like the military?

Well there's no econmetrics to measure their productivity but workplace injuries are off the chart.

And the longer the productivity growth miracle continues, the harder it becomes to write it all off as a measurement fluke.

Simon Kuznets decided in the 1930s that he couldn't do it, and was going to assume that the productivity of government workers was constant--never increased at all. There are estimates of productivity growth for non-profits, but nobody trusts them. The standard productivity numbers are for business and for nonfarm business, because those are the only sectors the government is even half-confident it can estimate...

The BLS only measures productivity in the
business sector. So there are no official measures
of government or other nonprofit sectors.

I take a little differerent view of the productivity data. We now have two quarters of productivity growth less than real GDP growth.
That is a significant trend change that implies we are seeing a normal cyclical productivity slowdown. If we are going to see employment, hours worked, wage & salary growth productivity growth has to be less than real GDP growth--
that is why the cyclical productivity slowdown is important. Roughly real GDP in business = hours worked times productivity

I remember reading on one of the economic blogs that US productivity figures include the value of foreign-provided components or services in the value of the product, but account only for the strictly US labor that goes into the final product.

In other words: If you have a 100$ product produced in 10 man-hours, the productivity is 10$/hour if it is completely US-made, but 100$/hour if 9 hours are done in India or Mexico and 1 hour in the US.

Maybe I misunderstood or misrember what I read and I am completely wrong here. I am not an economist by any length of the imagination.

Could you confirm or refute the above ?
If it is true, what is the effect on productivity numbers and employment ?

Greetings
Karl Heinz

khr: I cannot shed light on the facts, but my speculation is that foreign labor is only accounted for via the import price of the product, _if there is such an import price_. As such it should be deducted from the final product price. For "white collar" work that does not involve the exchange of goods, the US company has to pay foreign salaries or contract fees, and those amounts should be recorded and properly deducted.

But your underlying principle sounds plausible -- assuming that the 9 hours abroad cost $5/h (just to say some number), you would get $(100-5*9), i.e. $55/h.

The people doing these statistics are not stupid. But the stuff is very hard to measure and even hard to properly define. Try to gather 5 people at a table and define what actually constitutes productivity.

Karl-- your comments on ouput including the production of foreign workers is not correct.

Output is from the GDP data and in that data
imports are substracted so that production does not include the production of foreign workers.

GDP = domestic final demand less net trade less
change in inventories.

There is a strong posibility that we are missing imports of services from outsourcing in the import data because it does not flow through
a port and so is not included in the imports.

But the limited evidence suggest that even if this is true it probably is not that significant.

Is the productivity rebound a miracle?

Trend productivity growth since 1995 has been 3%.
This is about the same as the 1960-1973 trend,
but much better than the 1974-95 trend of 1.5%

From 1960 to 1973 productivity growth was equal to 68% of real GDP growth. From 1975 to 1994
this ratio was 55% and since 1995 it has been 85%. In a lot of ways, the unusual economic development this cycle has not been the strong productivity, rather it has been the weak economy.

Except for the fact that the strong cyclical bounce in this recovery lasted 2 years rather
than a more normal 1 year the productivity
rebounds looks a lot more like a return to the 1960-74 record. This is great, but I would not call it a miracle. The last two quarter increase
in nonfarm productivity has been at a 2.9% compound rate.Remember, we still do not fully understand why productivity slowed after 1975.

Is Adrian Spidle real? Or is he a strawman set up by Brad toget his blog rocking?

I'm not an economist, but those numbers don't look like a miracle to me.

Are you guys being sarcastic?

spencer writes "Output is from the GDP data and in that data imports are substracted so that production does not include the production of foreign workers."

Let's take that $30,000 Toyota that one just paid for. That would be a $30,000 item to subtract from the GDP, no? Let's put a number on the subsidy that Japan supports this product by way of fx intervention ( OK but not last month.) How about $3000? The total price tag for the car then is $33,000. $30,000 from the personal bank account and $3000 from the Treasury, no?
I admit to genuine confusion here.
OK and deliberate obfuscation, but it does seem plausible that the value of imports does not register accurately given artificially supported currencies.
A few checks could be made: Does excluding these import laden sectors make for more modest productivity numbers? Is there a correlation between foreign currency intervention by central banks and high productivity numbers?

To cm & spencer:

Thanks for clearing up my confusion about the outsourcing issue

Greetings
Karl Heinz

When interest rates are held artificially low by an overly accomodative fed funds rate, it gives incentive to business to invest more heavily in capital which makes existing workers more productive. (Especially since capital incurs no health benefits, workers' comp, etc.) So it should not surprise anyone that productivity is high and that Okun's Law loses it's punch. That's what I'd expect when rates are rock bottom low. If rates were higher, there would be less investment. The decision between investing in productivity-enhancing capital or employing more labor would be more favorable for labor (in a relative sense), no?

How much of this productivity growth might be due to underestimation of inflation. The productivity miracle and consistently high GDP growth seems to have started about the same time that our inflation measures were recalibrated in the mid 90's.

Thought it may not have sounded like it, the above post was meant to be a question. I would love to hear from someone who has a more in depth knowledge of the way inflation is measured and the effects of the changes in the mid-90's, including those to hedonic pricing conventions in IT and other areas.

This worship of productivity is idiocy. There are two sources of increased productivity. One is new technology and re-engineered business practices. The other amounts to screwing your labor force. Guess where the bulk of productivity increases in the last several years comes from. What makes this not just mean but stupid, is that the work force in total is also the consumer. You know those guys. Goose, Golden egg etc.

"This worship of productivity is idiocy.

Posted by SW"

Saying "This worship of productivity is idiocy." is idiocy. It's like saying "breathing out is idiocy because it's breathing in that gives us oxygen."

It's our productivity that makes us so much richer than the rest of the world.

Adrian

"It's our productivity that makes us so much richer than the rest of the world."

True. But our productivity is due, at least in part, to the degree to which we use a disproportionate amount of energy than the rest of the world.

I wonder if, when there were predictions of lower productivity recently, they had higher energy costs in mind...

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I'd also love to hear more details about the measurement of productivity. The growth in the past couple of years looks insanely high to me. One can find anecdotes easily, but most of these anecdotes are about manufacturing, which is only about 1/8 of the total economy. What has been the productivity growth in finance, banking, real estate, healthcare, telephone, intenet connection, cable services? Does anybody know?

"I'd also love to hear more details about the measurement of productivity. The growth in the past couple of years looks insanely high to me. One can find anecdotes easily, but most of these anecdotes are about manufacturing, which is only about 1/8 of the total economy. What has been the productivity growth in finance, banking, real estate, healthcare, telephone, intenet connection, cable services? Does anybody know?

Posted by pat"

Good question Pat. I think there's a significant cyclical component to productivity in all for-profit businesses. I kmow in the business I own that we were slow to reduce our employees hours as the economy slowed down and slow to increase their hours as the economy picks up. Thus we're producing more and making more per man hour.

Adrian

SW reminds us that one of the 2 sources of productivity increases ("screwing your labor force") is "not just mean but stupid, [as] the work force in total is also the consumer".
But isn't the hope that, eventually, foreign consummers will develop an appetite for the stuff we make?
And, eventually, that demand will generate appetites for products/services not yet imagined?
And, eventually, those "screwed" workers will be re-employed.

Not happening yet? Greenspan doesn't think so ...like the rest of us.
But AG also thinks the productivity is "awsome" ...unlike some of us. I mean me.
He leads us to believe that this is a sign that we can hang in there at 1% because the economy is so robust.
I think that this is a marketing posture. I think his reluctance to raise the rate, even 25bp, is a reflection of his assessment of our economic position.
And that assessment would not be "awsome".
I find the productivity numbers, like the inflation numbers not representing my experience. So, it's either change my meds (Get Happy!) or create an index that does reflect reality --one that avoids the official measures, not because they are 'cooked' or politically biassed in some way, but because, dammit, they are inadequate. The complexity of the subject has grown beyond the means by which it is measured/calculated. (A case in point: the BLS recently revised the way they measure the household and payroll surveys because they were giving conflicting views of employment).

Productivity is highly cyclical.
Nonfarm productivity was 4.3% in 2002 &
5.4% last year.

In the five previous cycles since the 1950s--
excluding the aborted 1980 recovery-- it
averaged:
4.6% in the first year of the recovery
2.2% in the second year of the cycle
1.6% in the third year of the cycle.

Interestingly, productivity is a great leading indicator because of the factors that make it cyclical. The main reason it is cyclical is that business delays making adjustment in employment for several reasons including uncertainty, costs, wanting to retain skilled labor,and a feeling of obligations to employees -- of course this is not what it us to be but there was a time when management considered a lot of thing besides maximizing quarterly earnings.

in the year ending in 1962-I it was 7%
and in the 1972 recovery it got to 5.4%,
so the last 2 years are not that unusual.

Although productivity is very important there have always been questions about how well we
measure it. Economists understanding of productivity leads a lot to be desired.
We are still debating why productivity slowed from 1974 to 1994. The main reasons center on energy, but there are other factors. As someone pointed out above one major source of productivity is replacing muscle power with mechanical power(oil).

When you get into measuring total factor productivity, including capital you are getting into a major ball of wax and this is not the proper forum to discuss it.

But part of the misunderstanding of the measurement issues stems from the way
GDP is calculated. GDP is production, but we do not directly measure production. We measure consumption and adjust that for changes in trade and inventories to indirectly measure output.
This gets to a pet peve of mine of hearing people say consumer spending accounts for 60% (? ) of production.
That is not true, consumption accounts for 0% percent of production, but it is not really important.

Spencer as usual gives some interesting empirical figures. But to what extent does the increased share of GDP growth attributable to productivity rate increases together with the relatively poor recent performance in the economy relative to the recent boom in productivity numbers reflect changes in the distribution of income since the post-war boom era, changes presumably having something to do with increased investment in technological systems that weaken the value and control of labor and increase the power of professional elites that are the end-users of such technological systems to channel income upward through corporate structures? The problem would be that productivity gains run against insufficient or lagging effective aggregate demand, as more and more workers/consumers with stagnant wages are tapped out on debt, (which is to say, further obligations to the upper income echelon), just to survive and get by.

It is obvious that productivity is the dominant reason employment and wage growth has bee4n so weak this cycle. Essentially all the gains in productivity have gone to capital so far. But that is not all that unusual. The normal cyclical pattern is to get an explosion of profits in the period when productivity first rebounds and as productivity slows wages & salary rebound. That is why profits normally lead personal income. But this cycle the productivity rebound lasted 2 year rather than 1 year so profits have been very strong and wages very weak this cycle. This is why I pointed out in the first post it is very significant that productivity growth is now less than GDP growth. That means we can start seeing employment and wage & salary growth. The greatest short-run economic risk stem from weak consumer income -- even Wall Street is very worried about this now.

John Halasz as gotten to the core of the problem.
Because of the reasons he cites and for other reaons one of the biggest problems in the economy is soaring income inequality. Moreover, it is not so much the poor that are being hurt the worse over the past decade it is the middle class that is really being squeezed.

The big problem of soaring income inequality is one reaon I find the Bush tax policies so bad. Rather than trying to offset the soaring income inequality his policies are making it worse. How much of an income transfer to the top few percent of the populaion can we stand.

Historically, income inequality has been justified because it generated more savings and investment. But that has not happened in the US as the saving rate peaked about 1980 and has been trending down ever since. Moreover, we now have a structural deficit that absorbs about 25%
of domestic savings.

Saying "This worship of productivity is idiocy." is idiocy.

No, the point of the original post is that we err when we consider all gains in productivity to be equal and positive. It is a blunt term that includes both positive and negative practices. Everything that increases the amount of labor performed per unit of employee is not in and of itself a positive thing.

Bravo, you finally drilled down to the essence of why productivity doesn't matter- wages don't go up in response to higher productivity, so the working classes (80 percent of us) don't benefit except from faster service at starbucks. Buy stock in companies that screw their workers hardest and have management as their largest shareholders, just watch management's paycheck.

That's a mighty long question/reflection jch. Are you trying to prune out the weaklings here or what? If you continue in this vein, your hopes for admission to the WH press corps are doomed.
I believe SW (productivity worship) above, agrees with your general theme that the resultant weak demand from the increased productivity creates 'the problem'.
Your query/suggestion about the connection ("to what extent... does it reflect changes") between productivity growth (or atleast " the increased share of GDP growth attributable to productivity rate increases together with...") and income distribution (since the post war boom era) seems plausible, even persuasive, but illuminating? No.
OK, I could be a weakling but you could reduce the 10 line question a tad.
Please.

"Y = C+I+G+CA"(Y=I?)

calmo:

It was just poor brain to typing coordination. This is not exactly news. I was thinking with some set of neurons of an old discussion of income distribution that I read in the 90's, stating that the large gains in income had not accrued to the actual producers of new technology. Engineers, programmers and the like are well-paid and their compensation is certainly an expensive labor cost, with some potential for bottleneck problems, but it is basically in line with value-added. The big beneficiaries of new technological systems in terms of large gains in income were said to be end-users of such systems in the upper professional ranks, doctors, lawyers, bankers, executives and the like. Presumably this would be because such technologies allow for major changes in the organization of business structures and controls, with the corresponding flows of funds, such that such "players" are strategically positioned to get first crack at extracting increased incomes from revenues, while, conversely, such investments in managerial capital are designed to control and decrease wage-labor costs. You are welcome to re-edit this paragraph, as you please. But it is doubtful that that would have any improving effect on me.

To Allen M.:

http://www.2020site.org/ulysses/sirens.html

jc (stream of consciousness who needs periods or commas can you hear me) halasz
Offer of future employment at Wh Press Corp refused? ( What will your children say?)
Most of us recognize the increasing disparities in income distribution. Even me. Some of us ( I mean you ) seem to think this is "basically in line with value-added". You seem to have a peculiar economic view of what I take to be a sociological matter. Still, a glance at the compensation statements from various companies shows an inordinate distribution weighted not heavily to the value-adders, but to the company executives. This too, is old news. And rotten. But a detail in the overall picture because it is just the micro-financial snapshot, no?
There is the social picture which is where SW is coming from (I think). The doctor who enhances his value-added by restricting his practice to only those who can afford lipo suctions, also enhances his access to timely real estate/investment information by having these 'heavy' clients.
Does this have much to do with economics? I don't think so. Anything to do with productivity growth mirroring income (and other) disparities? Some.

calmo:

My children are mutely and happily enjoying an eternity in Limbo. But thank you for asking.

"Basically in line with value-added" clearly referred to the product and compensation of engineers, programmers and other such workers. Your exemplary plastic surgeon would be illustrating something of the point I was making. Most doctors, however, are not living entirely high on the hog, but rather are busy being squeezed by HMO executives, and there are more lawyers than postal workers in this country, so, though I doubt many of them are poor, a lot of them must be scraping the barrel for clients.

Sociological/economic? Is that like the difference physiological/biological? The point I was making was organizational and concerned its intersection with technological developments. I was not claiming it's the whole picture, but just a piece of the puzzle. The point can be extended a little further though. Suppose there are two sets of new technology, both of which can increase the productivity in a given industry by a significant and equal degree. But the first increases the skills, participation and thus the leverage of the work force and the second decreases the same. Which one would attract the interest of investors? Obviously the latter. Further, it would still be preferred to the former, even if the former actually enhanced productivity to a greater degree, up to the point where its higher productivity overcame the increased rate of profit due to the enhanced distribution of net product in favor of the capital investors. If such situations occur with sufficient generality so as to lower wage levels and thus aggregate demand conditions, while the market value of capital is increased, due to higher profitability and lower interest cost of capital, the tendency is re-enforced. Then presto! There could be higher productivity without the sorts of redistributions of its effects that lead to higher demand levels. Or, at least, the required readjustments could be rendered more difficult and deleteriously delayed.

Spencer is an experienced technical economist who makes a lot of sharp empirical comments with a historical perspective. If he says the recent productivity boom has a large cyclical component, I'm in no position to disagree. But I was struck by his comment that the share of GDP growth attributable to productivity gains was sharply up compared to the fabled post-war boom. (I assumed he was citing real GDP growth in per capita terms.) So I added a comment suggesting something more was afoot in terms a medium-term trends, with respect to income distribution and its effects on aggregate demand, (which relationship is itself a large topic.) When you add in the dissavings connected with the income-effect of an equity market bubble, followed by a mortgage-refinancing boom and a return of massive government/trade deficits, then you get a rather strange picture that does not seem to bode well for the livelihoods of most people.

calmo: "Let's take that $30,000 Toyota that one just paid for. That would be a $30,000 item to subtract from the GDP, no?"

I'd say no. It is not unlikely that your Toyota has in fact been to a large extent assembled in the US (using parts from a variety of foreign countries including Japan of course). The foreign parts are foreign, but the assembly labor is domestic (provided your unit does come from here).

SW: "There are two sources of increased productivity. One is new technology and re-engineered business practices."

There is a third source: Hedonic price indexing, and other numbers-fudging schemes. And by "fudging" I don't mean fraudulent fudging, but well-intentioned but nevertheless misguided adjustments.

For example, the price volume of computers and certain other good categories is adjusted upwards to reflect improvements in quantitative and qualitative measures of the product. The reasoning is that increased processing power, disk space, larger displays, etc. make the computer more valuable, and you get "more" per unit, and this production of "more" must be reflected in GDP. That argument is understandable, but to a large extent it comes down to your being able to type a letter or slide set twice as well, whatever that means; in the office context the difference between today's and last year's computers is mostly that the jumping paper clip has been augmented by an animated ear-scratching dog in XP's search funtion, and that some (many?) laptops don't have PS/2 connectors anymore, so that you have to purchase new USB mice and keyboards.

On the CPI front, I suspect similar adjustments. When I look at what has been happening in the local grocery stores and other consumer-service categories over the last few years, it bears little resemblance to the supposed 1.5% or so inflation. It looks like much more, 5+% or so. On the other hand, local apartment rents apparently did decline a bit, although not dramatically. So maybe in order to get the 1.5%, you have to move to a cheaper apartment every year, hopefully without breakage of your property and without major transition costs.

Dr. DeLong,

Is this necessarily good news? I do not know economics, but I have a good memory, and I remember that you said, some time ago, that high percentage productivity increases make it more difficult for GNP percentage growth to reduce unemployment, since, even though demand might be growing, each worker is doing more to fulfill that? Or is it good news in the sense that productivity increases may combat inflation, which does not seem dead in my budget?

Not just hedonic pricing but adjustements that have reduced the share of energy in inflation indexes have inflated GDP. You cannot compare real GDP growth from before the changes with real GDP growth after.

As for productivity, you can also add in a very simple dynamic - if I move my lowest productivity (and thus least profitable) processes out of country to enjoy lower labour and infrastructure costs then there is going to be an increase in the productivity at home even if I do nothing else.

cm
OK, not all Toyotas are made in Japan. Maybe there isn't even one made entirely in Japan anymore. But suppose the sticker on This One Special Toyota says "Made in Japan".
I want to see how the folks at BEA handle this datum to tally a GDP number. I am unabashedly biassed--let's pare down those inflated GDP values to a point where we ( I mean me) can digest the productivity numbers. Your remarks about the hedonic pricing esp of computers are indisputable.

spencer (Mr. Stats [and thank you for most of them]) claims (above) that the entire business is misleading in that production is never measured --only consumption. (Maybe we should change the label to GDC or look at that gap between production and consumption, (unsold inventory?).)
So the (100%) domestic car that is not sold in the retail market but gets sold as a unit to the Avis fleet will register as a decrease in GDP? When it returns to the retail market does it recoup this difference? Does the same retail car that gets resold have the same impact on the GDP?
The details are defeating me.

calmo: car purchase

OK, here with made-up numbers: The dealer purchases/takes into commission the car for $20,000 from Toyota. Transportation of the car to the dealer's lot, insurance, mechanic/salespeople salaries, rent, etc., incur a proportional share of $4,000 in business costs while the car is spending time on the lot. You purchase the car, paying $30,000 plus registration fees, sales tax, etc., the dealer pockets $6000 and later pays taxes on it.

I'd say the dealer has "produced" $6,000 in "added value". Operational costs and the manufacturer purchase price have been properly deducted.

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