In the comments thread to a recent post, Brad de Long argues against my claim that it’s appropriate to focus on multifactor productivity, pointing out

falling prices of IT have led to an *enormous* increase in the rate of capital deepening. Stagnant capital productivity and slow growth in multifactor productivity are not inconsistent with rapid growth in labor productivity if capital goods become really cheap really fast…

On reflection, I think Brad is correct at least in principle. The point he makes reflects the distinction between “embodied” productivity growth, which arises from better and cheaper machines, and “disembodied” productivity growth, which is the residual captured in multifactor productivity calculations. The remaining issue is how the numbers work out

Read More »

Productivity is a somewhat mysterious concept, and I love untangling a good productivity mystery. As Brad de Long has observed in a string of recent posts, US productivity has behaved quite mysteriously in the last few years. The key facts noted by Brad are

• Labour productivity (output per hour worked) usually falls during recessions/slowdowns
• Over the last three years, US output per labour hour has risen, at an accelerating rate
• Over the same period, hours worked have fallen at a rate consistent with a deep recession

Brad’s hypothesis is that the increase in productivity is primarily due to technological progress in information and communications technology, and that the decline in hours worked is caused by the combination of rapidly growing productivity and inadequate demand. I don’t think this analysis can be sustained.

Read More »

I got this graph of US productivity growth from Brad de Long , and it struck me that it’s only after 2000 that there is any real action here. As Brad says, in a normal postwar recession, we would have expected a decline in productivity growth (and maybe even negative growth) arising from labor hoarding – this was the name given to the propensity of employers to keep workers on through economic downturns. Since most employers now engage in large-scale layoffs even during booms, it’s not surprising that labor hoarding is no longer an issue.

Still, given the triumphalist rhetoric that came out of the US throughout the Clinton administration, the productivity growth for this period was remarkably unimpressive. One possible explanation for the contradiction is that the graph shows changes in output per hour worked whereas most attention in the 1990s was focused on output per worker, which was rising with increasing working hours.

In any case, if productivity growth had declined in 2001 as usual, there would have been no story in this picture. For those who attribute economic outcomes to political leadership, the obvious explanation is that Bush has produced an economic miracle.

I don’t believe in miracles, and I also think there’s a problem with Brad’s analysis in which rapid productivity and slack demand produce rising unemployment. US demand for manufactured goods (which is still the most important single part of nonfarm business product) has risen since 2000, but the increase has been met almost entirely by imports. Hence, US manufacturing output has been roughly constant and hours worked have fallen by about 15 per cent. If US productivity was really rising as fast as the graph suggests, there should have been a fair bit of import displacement, especially since the dollar began depreciating a year ago.

Perhaps there are long lags in the process of adjustment to a depreciation (Australian readers of a certain age will recall the endless wait for the “J-curve”).

But I prefer some combination of the explanations I put forward in my post on productivity. In particular, there’s the problem of factor composition. The present recession is unusual because it has been characterised by massive overinvestment. With output growth weak, capital productivity has fallen.

In these circumstances, the best way to assess the underlying productivity trend is to look at multifactor productivity. Unfortunately the data is only published annually and the most recent estimates, from the Bureau of Labor Statistics are for the change from 2000 to 2001. As would be expected from the discussion above they show a rise in labor productivity and a decline in capital productivity. The net impact was that

From 2000 to 2001, multifactor productivity fell 1.0 percent in both the
private business sector and the private nonfarm business sector

. This was the first fall since 1991. I’d expect some recovery in capital productivity to have taken place since then, since investment has been weak, but it seems unlikely that MFP growth for the period since 2000 has been more than marginally positive.

I think we’ll have to put the Bush miracle in the shed with all the others.

There has been an interesting hypothetical debate over assassination futures, but apparently Thailand has the real thing.

This piece from the Economist covers some of the same points I’ve been making about work intensity (here and here. The summary is that the UK and France have approximately equal GDP per person. French output per hour is 20 per cent higher than British, but this is cancelled out by higher British employment rates and higher average hours per person.

I’ve argued in the past, that improvements in GDP achieved by longer hours and greater work intensity are largely illusory and the Economist largely goes along with this. On the other hand, higher employment rates are generally a positive way to achieve higher output, at least if the alternative is unemployment, rather than, for example, participation in full-time education.

A very similar analysis applies to the US, except that US productivity is about equal to that in France and other European countries, so higher employment rates and longer hours translate into higher GDP per person.

A final point is that the greater inequality in the US and the UK imply that the average (median) person falls further short of average (mean) income than in Europe.

Henry Farrell at Crooked Timber posted some critical remarks on public choice theory, and Kieran Healy chimed in with a piece on “Shake’n’Bake social theory” of the general form “A is really B”. For example, public choice theory can be stated as “politics is really a market for votes”. All of this can be applied at the meta-level, in the form “Theory A is really Theory B, with a change of names”. As it happens, I’ve used precisely this move to argue, that “Public Choice theory is really the Marxist theory of the state, and the associated political program is really Leninism”.

The central points of the Marxist theory are

(1) Politics is about struggle between economic classes. The state acts in the interest of the capitalist class as a whole, and arbitrates differences among Îfractionsâ of capital;
(2) Political ideas (except Marxism) are Îideologiesâ designed to rationalise class rule;
(3) The masses acquiesce because of Îfalse consciousnessâ associated with submission to a dominant or Îhegemonicâ ideology.

Translating to public choice theory, we get:

(1) Politics is about the struggle between interest groups. The state responds to the pressure of organised interest groups, typically tight coalitions of producer groups. Log-rolling between these groups produces an outcome which benefits them collectively at the expense of taxpayers and consumers;
(2) Political ideas (except free-market ideas) are ideologies designed to rationalise policies serving various interest groups;
(3) Voters acquiesce because of Îrational ignoranceâ which leads them to take little in-terest in politics and makes them easily subject to manipulation by political interests.

On the Leninist implications of both theories

If ideas do not matter, free speech is at best a luxury and at worst a distraction. Even if speech is not actually suppressed, it is debased. When political debate is seen as a charade by its participants, it naturally becomes one. Furthermore, since the system cannot be changed by reason, some form of ‘short sharp shock’ is required. The result is a cult of ruthlessness (the catchphrase here is ‘tough decisions’). Since opposition to oneâs policies is interpreted as a sign that interest groups are being hurt, it may be taken as evidence of correctness. The correct response is not to persuade oneâs opponents, but to override them.

This was in a piece published in, of all places, the Centre for Independent Studies journal, Policy. The editor in those days, Michael James, was an interesting person – too interesting for the CIS in the end, as I recall.

I’ve done one piece of historical revision in the above story. I didn’t explicitly identify authoritarian Marxism with Leninism in this piece, and I owe the idea of ‘Market Leninism’ to New Zealand economist Brian Easton.

If you want to read the entire article, it’s posted below.

Read More »

Occasionally my comments thread gets a contribution that deserves a fully-fledged post of its own. I posted one from Observa some time ago. Now regular commenter PM Lawrence has presented a history of transport in the UK, which I think deserves a bit more prominence than a comments thread.

Here is where it begins

As promised – an overview of the economic history of UK transport since the canal age (much omitted, obviously, e.g. no stage coaches or aircraft).

Of course, this should also provide some insights of wider applicability. I shall take the opportunity of making a few asides about things they told me during my Monash MBA studies that weren’t true, which I had more sense than to tell them at the time.

The idea and practice of canal building reached England in the late 17th century, from Holland, which had got them in turn from northern Italy (the term “canal” actually comes from the Italian).

Read More »

I was struck by a recent exchange in the comments thread to my post on libertarianism” in which commenter 24601 took violent exception to the suggestion by another participant in the debate that libertarians focused on the concerns of producers rather than consumers. This, 24601 said, was like asserting that libertarians are “greedy, nasty, evil people who like to kill babbies and don’t care about those silly consumers.”

Allowing for the overstatement characteristic of comment threads, this captures an important point about the free-market side of the policy debate in Australia. Concern with the interests of people considered as producers, in preference to the interests of the same people, considered as consumers, is regarded, quite literally, as evil.

I wrote about this in the Fin last year, also covering the themes of managerialism and professionalism. Some extracts

The last ten years have not been good ones for producers in Australia, whether the item produced is as basic and solid as steel or as abstract and intangible as academic research. Work is central to life, but disillusionment with and demoralisation about work has never been greater. Demoralisation is particularly evident among those groups of workers who derive meaning from theh good or service they produce, rather than just their paypacket. Examples include nurses, teachers and many workers in skilled trades.

It is not surprising that producers are having a hard time. Public policy has been dominated by economists who are openly hostile to ‘producer interests’ and see their mission quite explicitly as ‘shifting power from producers to consumers’. …

The fable of the straw that broke the camel’s back is, among other things, a warning about overburdening those who actually do the work. Economic reformers and enterprising managers have been adding straws to the bundle for at least a decade. It’s time to reduce the burden.

The alignment of free-market economics with a focus on consumers is not surprising. The most appealing feature of capitalism, after all, is the shopfront glittering with an unimaginable variety of goods. It’s during the eight (or nine or ten) hours a day spent producing those goods, if you have a job at all, that you get to see the less pleasant aspects of the system.

After discussing the absurdity of the capital-rich United States being by far the world’s biggest borrower and biggest debtor, Brad de Long observes

it is a Dark Night of the Soul for us neoclassical economists who believe in the long run and in the even partial rationality of international capital flows.

I went through the necessary loss of faith a few years ago. As I observed last October

If you accept that the $US has to depreciate at some time, then holding bonds denominated in $US, and receiving interest rates lower than those obtainable in other currencies, is a dumb idea. Unless you think either that European governments are likely to default on their debt or that euroland is poised for inflation, eurobonds are a better bet, and similarly for Australian government bonds denominated in $A. But I’ve given up even the residual belief in the efficient markets hypothesis that would lead me to try and work out a coherent explanation of perverse asset prices. (Emphasis added)

Despite the stunning contrary evidence of the past five years, residual belief in the idea of efficient capital markets continues to shape the thinking of most economists (including me, when I let myself be guided by instinct rather than careful reasoning). Only when we have freed ourselves of this incubus will we able to make progress in understanding the global economy. Because this is akin to a loss of religious faith it will be a difficult and painful process.

One of the striking features of world trade is the fact that nearly all the English-speaking countries run big current account deficits. The United States, formerly a big net exporter, has been in deficit for twenty years or so. The deficit has now reached 5 per cent of GDP despite a continuing recession/slow recovery. The UK has mostly run deficits for the past twenty years or so, though it still has strongly positive net investment income, reflecting its century or more as the main source of world investment. Australia and New Zealand are consistent deficit countries. Although they occasionally reach balance on the goods and services account, they are large net debtors, and therefore have consistent deficits on the income account. The only exception (and a relatively recent one) is Canada. Conversely of course, the rest of the developed world, that is, in essence, the EU and Japan run fairly consistent surpluses.

Why is this? I’m not attracted to cultural explanations for a couple of reasons. First, both the UK and US were, for a very long time, the major surplus countries. Second, if you go back only 25 years, the “English disease” referred to rampant union demands, class conflict and rigidities that hampered productivity. At least in the sphere of popular factoid, all these disabilities are now presented as characterising the EU and Japan rather than the English-speakers.

Of course, the change in stereotypes about laziness etc reflects the greater impact of neoliberal policy reforms in the English-speaking countries. So my question is: does neoliberalism cause current account deficits? And if so, is this a good thing reflecting the greater attractiveness of investment in these countries (the ‘consenting adults’ view, put forward prominently, though in a slightly different context by John Pitchford). Or is it a bad thing, reflecting debts incurred because of excessive borrowing by households and debts pumped up in speculative investment booms. Readers won’t be surprised to learn that I hold the latter view.

At the moment the’consenting adults’ view is dominant, particularly among supporters of neoliberalism. But looking at the way this group changed their tune after the Asian and Argentine crises, it’s not hard to predict that, in the event that things go sour, they will switch to the latter view very quickly and, as far as they can manage it, retrospectively (search on ‘crony capitalism’ for examples).

Via Jack Strocchi, update billmon at Whiskey Bar has more detail on the US case, including a neat way of presenting the data I haven’t seen before. In recent years, imports have grown by 40 cents for every dollar of GDP growth. I need to think a bit more about this.

A number of commentators have defended the ‘consenting adults’ view and have asked for a ‘market failure’ reason why it isn’t right. The obvious candidate is the moral hazard produced when financial markets are deregulated but the central bank continues to act as a lender of last resort. Exhibit A is Australia in the 1980s, which is when we ran our foreign debt up to its current levels. I don’t suppose anyone is going to claim that the investments of Bond, Skase, Elliott and others were good ones. Most of the debt in this period was borrowed through the Big Four banks. In a regulated system, they would have been stopped. In a fully deregulated system they would have failed. As it was they were rescued (Westpac being the most notable case). The story of state-regulated institutions (building societies and State Banks) is more complex, but basically the same. I put this argument forward in a piece in 1992, Partial financial deregulation and the current account?, Economic Papers 11(1), 53?56, which I notice is not up on my website. Another job waiting to be done!