Explaining (away) the productivity miracle
There’s been a lengthy debate, in the blogworld and elsewhere about the causes of recent growth in US labor productivity, and the associated fact that reasonably good output growth has produced little or no employment growth. Brad de Long, in particular has discussed this at length. My preferred explanation, which I put forward here is that
Beginning with productivity, it’s only labour productivity that’s grown rapidly and seemingly anomalously. Capital productivity has declined markedly, as has multifactor productivity (a weighted average of capital and labour productivity) In part this reflects the economics of embodied technical change – as computing power has become cheaper it has been applied more intensively. But there’s also a big hangover effect from the bubble and bust, when crazy signals from capital markets led lots of firms to undertake unprofitable investments. Once some semblance of reality returns, the natural response is to cut back and it’s much easier to sack the least productive workers than to reduce capital stock. So labour productivity rises fast, but output growth is weak.
This NYT piece gives lots evidence, admittedly msotly anecdotal, to back up my analysis. The key statement is the
the slow process of working through a glut of boom-era investment that continues to litter the economy with underused factories [ is weighing on job creation]
Along with lots of case studies of soap factories is the point that
Not since the severe recession of the early 1980’s has capacity use in manufacturing stayed so low for so long, government data show. Production as a percentage of total capacity fell precipitously in the aftermath of the last recession, which ended in 2001, and 23 months into the recovery, the upturn has still not come. On average, manufacturers are using less than 73 percent of their capacity.
If multifactor productivity were really rising we’d expect to see new investment and hiring as US producers displaced competing imports, especially with the dollar depreciating. But there’s no sign of this so far.
Updated Brad de Long has responded to the same article with a restatement of his main argument
Louis Uchitelle frames the issue the wrong way around: there is no such thing as “overinvestment,” there is only too little aggregate demand. If you think that there is “overinvestment,” dropping the interest rate will cure you of that belief. At least, it will until you hit a liquidity trap… But it looks like that is no longer a dangerous possibility.
There’s a disconnect here between the macro arguments Brad is making and the micro arguments I’m making. My intuition is that the size of the US CAD indicates that deficient aggregate demand is not the problem. But I need to think more about this.