On the willingness of economists to believe data that doesn’t make sense

Suppose I told you that the economy was about to go through its greatest financial convulsion in 75 years, causing a vicious disruption in the credit system and the global trading system. Consumers and small businesses would suddenly be cut off from access to credit, and large businesses would go into a fetal crouch and stop investing. A priori , would you expect that such a scenario would lead to

a) An acceleration in productivity growth,  or

b) A deceleration in productivity growth or even a drop in productivity.

My guess is that a majority–perhaps even a great majority–of economists would have answered (b) if I had thought to put the question to them.  After all, disruptions to credit, trade, and investment are terrible for the normal operations of business.

Why, then, were economists willing to accept the productivity surge of 2007-09 as gospel? It made no sense that businesses should suddenly function better  in the face of a financial crisis that nearly dragged down the whole economy.

I’ve noticed this willingness of many economists (and journalists, for sure) to accept the official data as gospel before.  It’s not a good thing.

P.S. You may guess that I’m revising my textbook.

 

 

 

Comments

  1. I don’t know that it was necessarily a bad hypothesis this time. The feeling was that the offshoring and technology replacement trends that were going on for the last decade merely accelerated during the downturn, as companies cut employees that they didn’t really need to maintain output. In fact, productivity still rose during the downturn, so I don’t know that you can say the crisis had that much of an impact on productivity. Also, the largest hit by the financial crisis were the investment banks like Bear or Lehman, which are probably not that important for day-to-day operations and lending at most companies. Very few regular banks collapsed, even compared to the ’80s, often because they were merged into larger banks. What were the factors that were revised the most in the latest productivity figures, dragging the numbers down?

  2. If you are right that productivity growth has been overstated and will be sharply revised down because of the new data how do you explain that profits have been extremely strong and were actually revised higher in the new data.

    Profits have been soaring because unit labor costs fell well below the rate of price increase allowing firms to build profit margins sharply. Unit labor costs fell because of the strong productivity.

    • Mike Mandel says:

      Oh, that’s easy. “Domestic” profits include gains from changes in sourcing. So if a U.S. company shifts from sourcing in Japan to sourcing in China, say, those gains show up as domestic profits.

  3. No, the production data subtracts the foreign sourcing so it does not count in the output measure.

    Try again.

  4. what type of productivity? TFP is going nowhere because technology advances (biotech) havent filtered into the real economy yet.

    labour productivity per capita should be up as less productive workers have been fired (not a good thing; see France)

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  1. […] In Mandel’s, it is well-meaning but mistaken government economists (as well as those who unskeptically rely upon them). In Minsky, it is the interplay of competitive dynamics and financing arrangements. The […]

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