Matt Yglesias: Wrong Crisis?

Matt Yglesias thinks that my Washington Monthly piece is talking about the crisis that “we should have had,” not the crisis we actually had.

I think sections of Tyler Cowen’s The Great Stagnation are about the crisis we should have had, that Michael Spence’s The Next Convergence is largely about the crisis we should have had, Joe Stiglitz’ recent Vanity Fair article is basically about the crisis we should have had, Michael Mandel’s piece on the myth of American productivity is about the crisis we should have had. I can name others. There’s no particular ideological tendency grouping these people together, since if we were facing a big profound crisis then it would be the case that we need big profound answers that can support a range of different ideological positions. Indeed, I would say that an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why long-term fiscal austerity is important and why there was no “holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors” moment back in 2009.

But this is not the crisis we’re having. Interest rates are low. Headlines tell us that “U.S. Factories Could Suffer From Dollar’s Appeal”. I’m inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we’re having is, for all its horror and scale, a pretty banal monetary crunch—the natural rate of interest is below zero, nomimal rates can’t go below zero, and the Fed won’t act to push real rates lower.

I don’t understand Matt’s argument. He cites low interest rates as evidence for his side. However, we would expect a slow growth, low-innovation crisis to push interest rates lower, since there would be fewer good opportunities for investment.

The other issue is that the economy is not behaving the way we would expect a high-productivity, high-innovation economy to behave. One example: real wages for new college grads have been falling for a decade, even before the recession. That shouldn’t happen if there were growing innovative industries for them to find jobs in.

The Myth of American Productivity

I have a new article in the Washington Monthly entitled The Myth of American Productivity. Take a look.

 

 

Obama Believes High Productivity Growth Story

I’ve been saying all along that Obama’s economic  policy was heavily influenced by the apparent high productivity growth figures  (see my lengthy post from March 2011 here ). However, I didn’t realize that the problem stemmed directly from the President.  According to Ron Suskind’s new book  (taking the excerpt from Brad DeLong’s blog),  Obama’s advisers were distressed that the President appeared to believe that high productivity growth was the main cause of high unemployment.

If Obama felt that 10 percent unemployment was the product of sound, productivity-driven decisions by American business, then short-term government measures to spur hiring were not only futile but unwise .

This explains an awful lot about the Administration’s unwillingness to tackle the job problem.  What makes this a tragedy is that much of the measured productivity ‘gains’ are actually driven by shifts to lower-cost suppliers overseas (see here).

 

Noahpinion on China and robots

Noahpinion gets what I’ve been trying to say, and says it better than I do in his post, “Are we replacing robots with Chinese people?” Here’s a meaty extract :

I’ve been critical in the past of Mike Mandel’s thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT…productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer – and I feel like this is what Cowen and Mandel may have been getting at – is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics B.A. like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a “public good”), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big deal. If we’re not channeling enough of our economic output into the production of new technology, we’ll all be poorer down the line.

And here’s the interesting part. Romer’s first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

“I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.”

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don’t bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

Yes. That’s it exactly.

Noahpinion also asks the very good question about what to do next.

 

Productivity Revisions Not Over

Back in March, I analyzed  the productivity ‘surge’ of 2007-2009  and declared it “highly suspect.”  (It was perhaps one of the longest blog posts ever).

Well, yes.  As I predicted five months ago, reality has won, and productivity growth has been revised down. This morning’s productivity release revised down nonfarm productivity growth in the 2007-2009 period from   2.3% to 1.5%.

But I don’t think the productivity revisions are over.   The published GDP stats, once you look under the hood, still tell a highly implausible story.  Once I do the appropriate adjustments,  the economic narrative changes:

*The bad news is that the U.S. economy is worse off than it looks, even now.

* The ‘not-so-bad news’, at least for Americans,  is that the next round of the financial crisis is likely to hit the rest of the world harder than the U.S. , even if the government does nothing.

To be continued.

Productivity “Surge” of 2007-09 melts away in new data

Until this morning, the official data showed that the U.S. productivity growth accelerated during the financial crisis. Nonfarm business productivity growth supposedly went from a 1.2% annual rate in 2005-2007, to a 2.3% annual rate in 2007-2009.  Many commentators suggested that this productivity gain, in the face of great disruptions, showed the flexibility of the U.S. economy.

Uh, oh. The latest revision of the national income accounts, released this morning, makes the whole productivity acceleration vanish. Nonfarm business productivity growth in the 2007-09 period has now been cut almost in half, down to only  1.4% per year.

This revision has political and policy consequences. Back in March, I analyzed the apparent productivity surge and  argued that it was statistically suspect.  I pointed out that:

First, the measured rapid productivity growth allowed the Obama Administration to treat the jobs crisis as purely one of a demand shortfall rather than worrying about structural problems in the economy.  Moreover, the relatively small size of the reported real GDP drop probably convinced the Obama economists that their stimulus package had been effective, and that it was only a matter of time before the economy recovered.

A more accurate reading on the economy would have–perhaps–cause the Obama Administration to spend more time and political capital on the jobs crisis, rather than on health care. In some sense, the results of the election of 2010 may reflect this mismatch between the optimistic Obama rhetoric and the facts on the ground.

Now the productivity surge of 2007-09 has vanished, and so is the pretense that the U.S. economy was able to sail   through the financial crisis with barely any problems.  It’s time to set a new economic course.

Reihan Salam on German Productivity

Germany has been held up as a model for the United States by David Leonhardt and others. Reihan Salam  correctly observes that German offshoring to Eastern Europe has been an essential part of Germany’s apparent success. He also  points out that:

The fall of communism was, as Marin suggests, a positive exogenous shock that proved a tremendous boon the German economy. A 20% increase in productivity is nothing to sneeze at, and I don’t think that David Leonhardt gave the role of offshoring its due in explaining the virtues of the German model.

Of course, the Houseman-Mandel thesis also tell us that German productivity gains, like U.S. productivity gains, might offer less than meets the eye.

Reihan raises a very interesting point which I hadn’t considered. Remember that our recent paper, “Not all productivity gains are the same. Here’s why”, we divided measured productivity growth into three types:

  • Improvements in domestic production processes
  • Gains in global supply chain efficiency
  • Productivity gains at foreign suppliers.

As we noted in the paper, these different types of productivity growth cannot be told apart in the conventional economic statistics. However, the type of productivity growth matters for domestic wages and jobs. For example,  productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.

We made our argument in terms of the U.S., but it potentially applies to other countries as well. I hadn’t considered Germany until Reihan raised the point, but in fact Germany appears to use a similar import price methodology as the U.S. (see for example Silver 2007) with the potential for similar problems, though I need to take a closer look to make sure.

Here’s something to think about: In a global economy, measured productivity growth in an industrialized country potentially may not measure only the strength of that country’s domestic economy, but also its ability to successfully offshore production to cheaper countries, with implications for domestic wages and jobs.

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