"The slower productivity grows, the smaller the bounty to be split among consumers, workers and shareholders. (How they split it is an issue, but that's another story.)"

Isn't the question of how the pie is split important enough to deserve more than a brush-off, in an article about consumer demand? Narrow the huge gap in wages between workers and executives, which has exploded post 70s, by shifting 'bounty' back to workers and these employees will be buying more airline tickets and other consumer goods. At least, the writer seems to require increased demand, in excerpt paragraph two.

Does Mr. Wessel ever get around to answering his editor's question as to the fate of those laid off workers? In this except I didn't see the connection between "[increasing] the economy's speed limit" through productivity aka downsizing, and increasing consumer demand. The unemployed 7% will presumably curtail their spending, for instance.

Maybe wiser heads will explain it for me. Thank you.

Companies lay off their employees and sell down their inventories. Productivity rises. Whoopee!

Companies lay off their employees and sell down their inventories. Productivity rises. Whoopee!

Companies lay off their employees and sell down their inventories. Productivity rises. Whoopee!

Companies lay off their employees and sell down their inventories. Productivity rises. Whoopee!

Obviously, productivity in comment posting is up 300%. Brad, you're going to have to dramatically increase the number of entries in your weblog so that the demand for comments can keep up.

Professor DeLong: Wasn't productivity growth impressive prior to the Great Depression? I have in mind this had been a period of springing start-up mechanical companies, most of which subsequently went bankrupt. Mmm, deja vu?

Anf while you're at it: check out how you can personally help the US economy. :)

The article jumps to a wrong conclusion by accidentally leaving things out. It's a bit like "if A doesn't work, not-A must work"; it doesn't allow for either a true dilemma in which it's too late and neither will work, or for some deeper synthesis that will resolve contradictions. (As a pessimist, I incline towards looking into the former possibility first.)

Yes, only increased productivity allows the kind of accelerating that - currently - would relieve unemployment and spread gains. But, isn't that just precisely how we got into a dependency on the accelerator? Have we sufficiently looked into the possibility that this is the logic of appendicitis or congestive heart failure, in which the short term reliefs are in fact increasing the underlying structural problems that require relief? And this is a thing which economists might not detect, from their habit of abstracting out capacity issues and emphasising issues of flow. (Derivatives and integrals, really - differential equations are easier to work with than their integral analogues, but lead to families of solutions by not building in the boundary conditions.)

As for "But we've tried the alternative -- slower productivity growth -- and it stinks." - well, no. It's been tried WITHOUT any synthesising of things from the other side. That is, only the plain vanilla version with its own set of problems has been tried. Nothing has been tried that tries to resolve things, and of course this does NOT prove that the opposite will work. One can run the same argument just as easily the other way round to support Luddism; but of course, this is where I came in.

i'm not an accountant, but i played one on tv.

another guy who gets screwed when a guy gets laid off is the guy who is left and has to do that fired guy's job as well as his job. productivity didn't increase as much as it was shoved into a smaller space to make it look bigger.

i know, it happened to me, on both sides of the equation.

Sir Alan 12/19
Another concern about deflation resides in labor markets. Some studies have suggested that nominal wages do not easily adjust downward. If lower price inflation is accompanied by lower average wage inflation, then the prevalence of nominal wages being constrained from falling could increase as price inflation moves toward or below zero. In these circumstances, the effective clearing of labor markets would be inhibited, with the consequence being higher rates of unemployment.

Taken together, these considerations suggest that deflation could well be more damaging than inflation to economic growth. While this asymmetry should not be overlooked, several factors limit its significance. In particular, more rapid advances in productivity can make this asymmetry less severe. Fast growth of productivity, by buoying expectations of future advances of wages and earnings and thus aggregate demand, enables real interest rates to be higher than would otherwise be the case without restricting economic growth. Moreover, to the extent that more-rapid growth of productivity shows through to faster gains in nominal wages, there will be fewer instances in which nominal wages will be pressured to fall

Well if you have a job!
Can somebody tell me where this "regime" word that I keep seeing over and over got its start

'Yes, only increased productivity allows the kind of accelerating that - currently - would relieve unemployment and spread gains. But, isn't that just precisely how we got into a dependency on the accelerator? Have we sufficiently looked into the possibility that this is the logic of appendicitis or congestive heart failure, in which the short term reliefs are in fact increasing the underlying structural problems that require relief? And this is a thing which economists might not detect, from their habit of abstracting out capacity issues and emphasising issues of flow. (Derivatives and integrals, really - differential equations are easier to work with than their integral analogues, but lead to families of solutions by not building in the boundary conditions.)'

Hayek's hangover theory: it's baaaaaack.

(Possibly) apocryphal story: An American consultant was hired by the Chinese government to advise them on a dam building project. He arrives, and sees 300 men digging with shovels. Immediately, he says, "You could do all this work with one man and one bulldozer." The Chinese manager responds, "Oh, no, that would destroy jobs!" American consultant walks back to his car, digs around in a bag, and pulls out a box of plastic spoons. (He never did learn to eat with chopsticks.) He hands them to the Chinese manager. "What are these for?" the manager asks. "Well, if you want to build a dam, have the workers use a bulldozer. If you want to create jobs, get rid of the shovels and have them dig with the spoons."

I always run into a problem when reading this productivity stuff. Yes, faster productivity growth allows for faster real income growth. I'm with you. Faster real income (and output) growth means there is more to go around, at any given level of work hours. That's one stick.

Employment, as it is understood in my Econ 101 text, is supplied by workers, not demanded. It is not a good, not sought out for its own sake, but for the sake of utility that it provides through twice monthly electronic transfers from employer to worker. That's the second stick.

When I rub the two sticks together, all I get is a cloud of smoke. Why are we all so bothered by a higher level of leisure at a higher level of material wealth, than we could ever have had in the past? Why isn't the labor supply curve always and everywhere backward bending? I understand some of the problem is distributional - my wife went back to work to distribute more to us. But it really troubles me that she felt that need. We are already richer than any country in the history of the world, and as the good professor points out, better off than most kings and queens throughout history, in a purely material sense. Can't we all just learn to get along ... with more than we had before, but less than we could have if we devote every available hour to work?

Interesting that Wessel can find no fault with fiscal policy in relation to stimulus, when recent fiscal policy changes have clearly not been aimed at addressing the short-term problem of overcapacity.

K Harris: interesting question. I think you're really asking a question about personal choice, which should be free. What bothers me about this discussion -- and this doesn't refer to your post specifically -- is that countries with longer work hours get richer faster. It isn't quite the neutral trade-off it seems to be made out to be. It will have an effect on our descendants.

I sort of surprised to see this post on Brad's site.

Productivity growth leads to higher wages. It can come from increase in productivity of labor or capital, but given competition in capital markets, it all ends up in wages over the long term.

People work harder as they earn higher wages because leisure is more expensive. Leisure is also a normal good, so as people get richer they also consume more leisure. Depending on the income level and circumstances, one effect can be larger or smaller than the other.

At an economy wide level, there is no such thing as too much capacity -- only insufficient demand. At the national level in the US, there is currently insufficient demand, thus low growth in employment. In individual industries, there can be overcapacity, which is usually very painful to get rid of.

zimran
http://www.winterspeak.com/

In one of the earlier productivity discussions, I made the ill-mannered but basically correct observation that productivity was basically economic measurement without prices. K. Harris points out that this did not go far enough. It also leaves out individual choices. So, we are now discussing economics while ignoring both prices and choice. What's left? Is that what macro comes down to?

Excuse my ignorance, but why is it that "at an economy wide level, there is no such thing as too much capacity -- only insufficient demand."?

No, what I put was NOT Hayek's hangover theory all over again. That states that recessions arise from problems created by overdoing it during booms. What I asked didn't relate to recessions.

I asked, is there any damage that can be done by overdoing it (common ground with the hangover theory) and that can be temporarily kept at bay by overdoing it (not present in all versions of the hangover theory). Even if there were a complete overlap so far, there is still a difference. My question went to the damage, not to whether it led to recessions. For instance, I would find a long boom that hurt people a case of damage not involving recession.

And I still don't know of any research related to whether or not that kind of damage occurs; only with whether recessions arise in other ways (which I am not asking about anyway).

"why is it that 'at an economy wide level, there is no such thing as too much capacity -- only insufficient demand.'?"

At an economy wide level you don't have substitution from one industry to another. All industries are endogenous to the system.

Another way to think about is that at an "economy level" you're including ALL AVAILABLE capital (sort of by definition). Therefore the problem can't be that capital is in the wrong place, it has to be that there is insufficient demand to put all that capital to work.

At an industry level his is not true -- all capital is not endogenous to a particular industry. Therefore at an industry level you can have too much (or too little) capital/capacity, and over time it will shift to uses that are more productive. Note that this shift can be very painful and traumatic for the people effected.

So it does not really make sense to claim that there is too much productivity at an economy level (although this may be true in several industries) -- the real problem is that there is too little demand.

-zimran
http://www.winterspeak.com/

As regards that last - here is where multi-factor productivity starts to matter. All you have put remains true, but the issues show up in terms of which factor is being measured. We can get substitution betwen the factors, and of course unemployment doesn't show as total labour input when there is a separation between the unemployed and those working overtime.

It DOES make sense to talk of "too much productivity" when this is on an implied "...labour productivity, assuming suitable inputs of other factors for other parts of wider productivity". It may or may not be true, but it does make sense.

Zimran Ahmed's answer to why there can be inadequate demand but not excess capacity (economy-wide) is the correct one, within the terms of the economic debate. It is useful to remember that the terms of the debate assume a preference for ever greater consumption and output. Under those terms, there cannot be excess capacity because boosting demand to meet capacity is the "right" answer. In the short and medium term, when capital is stuff, equipment, and not the capacity to build stuff, it doesn't mean all that much, as far as I can tell, to say that there can be excess capacity in individual sectors but not in the economy as a whole. A steel furnace cannot be usefully shifted over to lightbulb production. Excess capacity is simply the amount of capacity that is idled because nobody wants its output. In the long run, there can be a choice to invest in lightbulb making stuff rather than steel making stuff.

I think I was the first to use the term in this series of posts, and I had in mind exactly what Zimran Ahmed says - I was refering to policies which do less to boost demand than other policies with the same budgetary price tag might have done.