Most manufacturing industries are still flat on their back

This is a long post, but not epic.

A new story from the Associated Press argues that there’s been a big productivity surge in the U.S., post-financial crisis. Paul Wiseman writes: (my emphasis added)

The reason is U.S. workers have become so productive that it’s harder for anyone without a job to get one.

Companies are producing and profiting more than when the recession began, despite fewer workers. They’re hiring again, but not fast enough to replace most of the 7.5 million jobs lost since the recession began.

Measured in growth, the American economy has outperformed those of Britain, France, Germany, Italy and Japan — every Group of 7 developed nation except Canada,

According to the conventional wisdom, as summarized by Wiseman, the U.S. has sailed through the crisis in better shape than our industrialized rivals.  The conventional wisdom also says to the degree that we have a jobs problem, it’s because we are so good at boosting output and productivity.  

Of course, this directly contradicts my recent post, where I argued that the apparent productivity gain  from 2007-2009 was to  a large extent the result of mismeasurement.

But now let me make a different point. Wiseman argues that companies are producing more than when the recession began.  

I don’t think he’s right for most of manufacturing.

I’m going to show a series of charts for various manufacturing industries. These charts show shipments, adjusted for prices changes–‘real’ shipments.  Real shipments are a good measure of  what actually comes out of the factory.  

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How much of the productivity surge of 2007-2009 was real?

[This post just grew and grew and grew, until it turned into something  ridiculously long. Sorry about that–I’m probably guilty of blog abuse.   If you want, here’s a PDF version. I look forward to comments ]

Summary

In the 2007-2009 period, the U.S. economy experienced its worst recession since the Great Depression. Nevertheless, despite this deep downturn,  the near-collapse of the financial system and unprecedented global economic turmoil,  U.S. productivity growth actually seemed to accelerate in the 2007-2009 period, or at least maintain its previous pace.

The 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation.  Second, it convinced the economists of the Obama Administration that the economy was basically sound, and that the big problem was a demand shortfall. That’s why they expected things to get back to normal after the fiscal stimulus.

However, I’m going to show in this post that the  productivity gain of 2007-2009 is highly suspect.  Using BEA statistics,  I identify the industries that contributed the most to the apparent productivity gain, including primary metals, mining, agriculture, and computers and electronic products. Then I analyze  these high-productivity growth industries in detail using physical measures such as barrels of oil and tons of steel. I conclude  these ‘high-productivity’ industries did not deliver the gains that the official numbers show.

Based on my analysis, I estimate that the actual productivity gains in 2007-2009 may have been very close to zero.  In addition, the drop in real GDP in this period was probably significantly larger than the numbers showed.  I then explore some implications for economic policy.

Overview

I start by giving several  data points.

*From 2007 to 2009,  business productivity rose at a 2.4% rate, according to the official data. By comparison, the productivity growth rate was only 1.2% over the previous two years (2005-2007).

*If you like your numbers quarterly, business productivity grew at a 1.8% annual rate from the peak in 07IV to the trough in 09II.  That’s somewhat faster than the  1.6% growth rate of the previous 3 years.

*Looking at  total economy productivity–real GDP divided by full-time equivalents (FTE)–we see that productivity growth in 2007-2009, at 1.6% per year,  was double that of the previous two years (0.8% per year).

This chart breaks down productivity growth by business cycle, using the official statistics. You can see that the productivity growth of the 2007-2009 period–the worst recession in 70 years–appeared to be basically a continuation of the productivity gains during the boom. You can’t tell from this chart that anything bad happened to the economy.

The strong measured productivity growth during the crisis years reflects a steep drop in employment (-5.7%) combined with an apparently mild two-year decline in real GDP (-2.6%).  Of course, ‘apparently mild’ is still nastier than any post-war U.S. recession, but a 2.6% decline in real GDP translates into a 4.4% decline in per capita GDP, which puts the U.S. at the low end of  financial crises described by Reinhart and Rogoff.

What’s more, the 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation. 

Second, the productivity gains convinced the economists of the Obama Administration that the economy was basically sound and there was nothing wrong with  the ‘supply-side of the economy.  Instead, the Obama Administration concluded that the big problem was a demand shortfall, which is why they expected things to get back to normal after the fiscal stimulus.

Consider this April 2010 speech from Christina Romer, then head of the CEA. She said:

The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand. Despite three quarters of growth, real GDP is approximately 6 percent below its trend path. Unemployment is high fundamentally because the economy is producing dramatically below its capacity. That is, far from being “the new normal,” it is “the old cyclical.”

Perhaps more important from a political perspective, the productivity surge  helped convince the Obama economists that the job loss was ‘normal’ in some sense. That is, the rise in productivity suggests that the financial crisis apparently just accelerated the normal process of  making U.S. businesses leaner and more competitive, and there was no structural problem. In fact, that’s what Romer said in her speech:

In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

If productivity was rising, then the job loss was due to a demand shortfall and could be dealt with by stimulating aggregate demand. That, in turn, helps explain why the “job problem”  didn’t seem so urgent to the Obama administration, and why they spent more time on other policy issues such as healthcare and regulation.

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A Shrinking Nonoil Trade Gap? Really?

I’m going to talk about Friday’s GDP report. But first, two  questions to test your knowledge of the last ten years of U.S. economic history .  

1. According to the official statistics, the share of non-oil goods imports in the U.S. economy is   ______ today than it was in 2000.

a. Higher

b. Lower

 

2. Over the past ten years real GDP has increased 18%, according to the BEA. Over the same period, the real trade deficit in goods, ex imported oil, has increased by how much, according to the official statistics?

a. 5%

b. 18%

c. 30%

 Write down your answers, and don’t peek at the data! (you can tell that I’ve been hard at work revising my economics textbook)

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Really? Ireland/Iceland/Greece Outperform Germany?

Is it true that the three basket-case countries of Europe–Greece, Ireland, and Iceland–have outperformed Germany on real GDP and productivity growth? Or do the implausible official numbers demonstrate the bankruptcy of the global economic statistical system?

I was nosing through the just-released OECD Economic Outlook (top secret project, don’t ask), and I noticed something very interesting.  The Outlook includes forecasts through 2012 for all sorts of macroeconomic variables,  so we can now look at a 15-year time period (1997-2012) which includes the ten years of  tech+housing boom (1997-2007) and the five years of the financial bust. Here are two charts comparing the strongest economy in Europe, Germany, with the three basket cases, Greece, Ireland, and Iceland. We’re looking at real gdp growth and total economy labor productivity growth:

 and

These charts show that the three basket-case countries of Europe–Greece, Ireland, and Iceland–substantially outperform Germany during the boom years, which is to be expected (blue bars).  For example, Greece had productivity growth averaging 2.4% per year from 1997 to 2007, compared to only 1% per year for Germany.

What is more surprising is that  Greece, Ireland, and Iceland continue to outperform Germany, even when we factor in  the 5 years of the bust, including forecasts through 2012 (the red bar).  For  example, average real GDP growth in Iceland is projected to be 2.7% annually over the 1997-2012 time period, almost double the 1.4% growth rate of Germany.

What can we make of these disparities? After all, we economists have been trained to believe that productivity growth is an essential measure of the health of an economy. Here are four possible explanations:

  1. OECD forecasters have drunk too many bottles of wine, leading to overoptimistic forecasts
  2. Five years post-bust is too short: The basket-case countries will be suffering for many years.
  3. Boom-and-bust beats slow-and-steady in the long-run.
  4. The usual way of measuring Gross Domestic Product overestimates  both debt-fueled growth (Iceland, Greece) and growth fueled by supply chains (Ireland).

As anyone who has been reading me for a while knows, I lean towards #4.  I think there’s a first-order problem with the way we measure GDP growth, because trade–including flows of knowledge capital–is being incorrectly counted, or not counted at all.*   That’s a big gotcha, since bad macro data have and will distort decision-making by policymakers,corporate leaders, and investors.  

*I will recap the full set of statistical issues in a post soon. If anyone wants to be on my “alternative system of global economic statistics” mailing list, just drop me a note.

Regulatory Paygo meets Crowdsourcing.

I noted with great interest Senator Warner’s op-ed piece in the Washington Post on Monday,

…our current regulatory framework actually favors those federal agencies that consistently churn out new red tape. In this town, expanded regulatory authority typically is rewarded with additional resources and a higher bureaucratic profile, and there is no process or incentive for an agency to eliminate or clean up old regulations.

As a former CEO, I think the best option is to adopt a regulatory “pay as you go” system. I am drafting legislation that would require federal agencies to identify and eliminate one existing regulation for each new regulation they want to add.This

This regulatory paygo system is closely related to the countercyclical regulatory policy that I proposed earlier this year. In both cases the goal is not to deregulate but rather identify a limited number of  regulations that are both costly and not achieving their original purpose.

Now, identifying regulations that fit these two criteria isn’t easy. So here’s what I’d like to do. If any of you have any suggestions for regulations that are both costly and fall short of their intended purpose, please let me know–either in the comments or in direct emails to me. I’d ultimately like to get about 5.

Tax Cuts and Growth

Ezra Klein writes:

If you’re worried about stimulus, joblessness and the working poor, this is probably a better deal than you thought you were going to get.

That’s my feeling too.  My short-term optimism about 2011 has gone up several notches. Klein also notes:

last week, all Washington could talk about was the potential for a deal on deficit reduction. This week, it actually got a big deficit deal — but it was a deficit-expansion deal. In the world that politicians claim they live in — where the deficit is the overriding issue — the deal couldn’t have worked. But we don’t live in that world. In this world, tax cuts, not deficits, are the Republicans’ central concern, and stimulus, not deficits, obsesses the Democrats.

Two responses. First, both parties have the economic literature on their side, which says that deficits don’t have negative consequences  in the short-run as long as they are not “too big.”  The deficit talk was just posturing.

The real issue is not the budget deficit, but rather balancing out  two competing forces:  Having the government intervene where needed to help people while making sure that innovation and growth is not crushed under the weight of excessive regulations.  That’s the debate we should be having.

Red tape strangling innovation

A great op-ed in today’s Washington Post entitled “Strangling innovation and job creation with red tape”. Morris Panner writes:

As a Democrat whose politics are undeniably liberal on social issues, I lamented the outcome of the midterm elections…..

…..We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

….And the Obama administration’s new regulatory initiatives make this considerably worse in subtle ways.

The two largest pieces of legislation enacted in the past two years – health care and financial reform – are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide “almost everything” about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

There’s a lot more good stuff here.

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