The mystery of productivity: what mystery?

Another old one. Trying to catch up after the Thanksgiving break. Mainstream economists seem always puzzled by productivity. It is the source of growth and a mystery (Helpman has a book titled The Mystery of Economic Growth). They refer to trends in productivity as puzzles, in particular the slowdown after 1973.

 

Alan Blinder: reminds us that after the surge in productivity growth, that for a while at least was referred to as the New Economy, associated to information technologies, has collapsed to even lower levels than the 1973-1995 period. He is, as a good mainstream author, quite puzzled. In his words, "quite surprisingly and still somewhat mysteriously, productivity growth plummeted [after 1973]... We are all in the dark."

In Jeon and Vernengo (2008) we suggest that labor productivity is endogenous, explained essentially by the expansion of demand, and old idea, implicit in Adam Smith's vent for surplus, and part of a well established empirical regularity, the so-called Kaldor-Verdoorn Law. In other words, it is the weak recovery, caused by a contractionary fiscal stance, and the slow pace of private spending growth as employment increases, that explains the poor performance of productivity. In this sense, the causes are considerably simpler, connected to macro policy, rather than the long-term pessimism of Gordon and Summers, which now talk about secular stagnation (see also this book).

Perhaps the more interesting stuff in Blinder's piece is his discussion of what the 'serious people' in the mainstream consider the natural rate to be. He says:

"the 'central tendencies' in the Federal Open Market Committee’s latest published forecasts range from 5.2% to 5.5% for the 'full-employment' unemployment rate, and from 2% to 2.3% for the potential GDP trend."

Note that Blinder also thought that the speed limit was around 2% back in the late 1990s (here his debate with Bluestone and Harrison). And yes he is a Keynesian (a New Keynesian). With friends like this...

A periodization of Latin American development in the Robinsonian tradition

New Working Paper available here. From the abstract:

This paper analyzes Joan Robinson’s growth model, and then adapted in order to provide an exploratory taxonomy of Growth Eras. The Growth Eras or Ages were for Robinson a way to provide logical connections between output growth, capital accumulation, the degree of thriftiness, the real wage and illustrate a catalogue of growth possibilities. This modified taxonomy follows the spirit of Robinson’s work, but it takes different theoretical approaches, which imply that some of her classifications do not fit perfectly the ones here suggested. Latin America has moved from a Golden Age in the 1950s and 1960s, to a Leaden Age in the 1980s, having two traverse periods, one in which the process of growth and industrialization accelerated in the late 1960s and early 1970s, which is here referred to as a Galloping Platinum Age, and one in which a process of deindustrialization, and reprimarization and maquilization of the productive structure took place, starting in the 1990s, which could be referred to as a Creeping Platinum Age.

John Cochrane on Deflation

This is a bit old. Cochrane, the medieval dark lord of macroeconomics (Krugman suggests he has been an example of the Dark Age of Macroeconomics), has taken issue with the notion that deflation is a big problem. He suggests that: "Friedman long ago recognized slight deflation as the 'optimal' monetary policy, since people and businesses can hold lots of cash without worrying about it losing value." He explains that the reason for fears of deflation are associated to debt-deflation (the other two arguments are less relevant, namely: sticky wages and space for a higher inflation target).

He argues, however, that debt-deflation is not a problem. For him:

"Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. A 100% debt-to-GDP ratio is, after a year of unexpected 2% deflation, a 102% debt-to-GDP ratio. You’d have to go decades like this before deflation causes a debt crisis."

In his view, small amounts of deflation are not  enough to lead to a collapse of the economy. And he says the dreadful deflation spiral never happened, not even in Japan. So don't be afraid, deflation is actually kind of good.

He is talking about the general price level, and clearly we haven't have significant deflation in the Consumer Price Index (CPI) or other broad inflation index since the 1930s. Yet, as the graph below shows we did have significant asset price deflation in the US, with housing prices falling by 31% or so, not just 2%, right before the recession.

In other words, there was significant collapse of prices that bankrupted several homeowners. The problem  was not just the negative effects of price adjustments on spending though. Cochrane supposes that all adjustments are on prices, since the economy has a tendency to move back to its natural output (unemployment) level. Crises (debt crises) are not just caused by the increase in the real value of debt (debt-deflation), they are more often than not the result of the collapse of the ability to pay, for countries when the value of their exports collapse (negative terms of trade shock), for individuals when they lose their jobs.

The problem is that with less prospects of growing demand (consumption, that was affected by stagnant wages and asset price deflation), and more so after the collapse of Lehman and the severe contraction in credit, firms fired about 9 million workers, reinforcing the negative quantitative effects of lower demand. The multiplier (which Cochrane thinks doesn't exist) works in both directions. So even small amounts of deflation, in an economy with quantity adjustments, might cause significant problems (and quantity adjustments are not the result of any wage rigidity, even if those exist, since no firm would hire an additional worker, not even at a lower nominal wage, if demand is not growing).

Think of Greece for example, where deflation (CPI deflation) is the result of contractionary policies that also led to the skyrocketing of unemployment, now at more than 25%.

The deflation is not particularly large, less than 2% actually. But the policies that cause the Great Depression levels of unemployment, and weaken the labor force, and lead to lower nominal wages, are the same that explain the deflation. In Greece deflation per se is not the problem. The lack of expansionary demand (fiscal) policy is. The problem is the obsession with low inflation, which leads to an overly contractionary policy stance. And that's what most authors that complain about deflation actually mean. For Cochrane Greece is fine, one would imagine, after all deflation is less than 2%. I suppose the natural rate of unemployment is probably 25% for him.

Quotes

 

"Of the tendencies that are harmful to sound economics, the most seductive and, in my opinion the most poisonous, is to focus on questions of distribution." Robert Lucas Jr. (see here, last paragraph).

"Political Economy you [Malthus] think is an enquiry into the nature and causes of wealth; I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation." David Ricardo (see here).

Both cannot be right.

Dean Baker on The Paid Vacation Route to Full Employment

 

By Dean Baker:

The economics profession has hit a roadblock in terms of being able to design policies that can help the economy. On the one hand we have many prominent economists, like Paul Krugman and Larry Summers, who say the problem is that we don't have enough demand to get us back to full employment. There is a simple remedy in this story; get the government to spend more money on items like infrastructure, education, and clean energy. This is a simple story, but politically it is a non-starter. Few Democrats are prepared to push for anything more than nickels and dimes in terms of increased spending, nothing close to magnitudes that would be needed. As far as the Republicans in Congress, it would be easier to convert the Islamic State folks to Christianity. (We could also boost demand by lowering the dollar and thereby reducing the trade deficit, but economists don't talk about that one.) The other side of the professional divide in economics doesn't have much to offer on full employment because they say we are already there. The argument goes that people have dropped out of the labor force because they would rather not work at the wage their skills command in the market. In this story, we may want to find ways to educate or train people so they have more skills, but unemployment is not really a problem in today's economy. The notion that seven million people (the drop in population adjusted employment since the start of the recession) just decided they don't feel like working, doesn't pass the laugh test outside of economic departments and corporate boardrooms. This leaves us stuck with a policy prescription - more stimulus - that has zero political prospect any time in the foreseeable future. There is an alternative.

Read rest here. 

Rosnick & Baker on The Wealth of American Households

By David Rosnick and Dean Baker

From the Abstract:

This paper presents data on the wealth of households by age cohort based on new data from the 2013 Survey of Consumer Finances (SCF). It shows that the upward redistribution of wealth continued between 2010 and 2013. As a result, most households had less wealth in 2013 than they did in 2010 and much less than in 1989, the first year examined. This is in spite of the fact that households were much less likely to have traditional defined-benefit pensions than in prior decades.

Read rest here.

Economists Without Borders (Economistes Sans Frontières)

By Thomas Palley

Inspired by the work of Doctors Without Borders (Médecins Sans Frontières), I have recently started a project called Economists Without Borders (Economistes Sans Frontières). Its purpose is to inoculate the global economy against the virus of neoliberalism. Last week, I had two difficult “missions” to Vienna and Warsaw.

In Vienna, I confronted an outbreak of the neoliberal globalization – free trade strain of the virus. Without doubt, this is the most virulent and dangerous of all strains. People who get infected become blind to all evidence, deaf to all argument and prone to intellectual condescension. Massachusetts Avenue in Washington DC is a hot zone of infection. The bad news is that if you are over forty and infected it is doubtful you can be cured. However, younger patients have a chance of recovery. Here is the anti-viral I prescribed titled “The Theory of Global Imbalances: Mainstream Economics vs. Structural Keynesianism”.

In Warsaw, I confronted an outbreak of Milton Friedmanism which is one of the oldest strains of neoliberal virus. Friedmanism is a gateway virus that weakens defenses against other neoliberal strains and younger minds are particularly susceptible to it. The good news is that if diagnosed early there is a good chance of recovery. However, if treatment is delayed, intellectual ossification and closed-mindedness sets in. This ossification is almost always associated with inflation obsessive compulsive disorder and austerity fever. Here is the treatment I recommend titled “Milton Friedman’s Economics and Political Economy: An Old Keynesian Critique”.

Restoring Shared Prosperity: A Policy Agenda From Leading Keynesian Economists, December 2013, PDF available at www.thomaspalley.com, book available at Amazon.com.

Cooney & Vernengo on the Global Crisis of Capitalism

Professors Matias Vernengo and Paul Cooney discuss their analyses of the global economic crisis.

Amitava Dutt on Pluralism (or lack thereof) in Economics

The recent issue of ROPE is an excellent symposium on nature of pluralism (or lack thereof) in contemporary economics. This following article by Amitava Dutt is quite insightful.

From the abstract:

Recent debates about the nature and desirability of pluralism in economics suffer from a lack of clarity about the meaning of pluralism. This paper attempts to remedy some aspects of this problem by distinguishing between different dimensions of pluralism, that is, epistemological, ontological, methodological, normative and prescriptive dimensions. Although, in principle, these dimensions are distinct, they are difficult to keep apart because of the relations that exist in terms of choices made in the different dimensions. It is argued that the recognition of these distinctions and relations allows for a resolution of some of the debates about pluralism.

Read rest here (subscription required), and for an introduction to the symposium by John Davis, see here (subscription required).

Tom Weisskopf on 50 Years of Radical Political Economy

From the abstract,

I examine first how radical political economy (RPE) has evolved over the last five decades, as the overall political climate in the United States has shifted increasingly to the right. I explore how this political shift, as well as new developments within mainstream economics, have altered the focus of much of RPE and the activities of many of its practitioners. I then offer suggestions to radical political economists as to the future orientation of RPE.

Read rest here (subscription required).

And for other posts on the nature & evolution of radical political economy, see here & here.

Elizabeth Warren on Fed Appointments

Warren says that Obama should pick nominees for the Board of Governors vacancies that would "look out for Main Street, not big banks." More precisely:

"The five sitting governors have a variety of academic and industry experience, but not one came to the Fed with a meaningful background in overseeing or investigating big banks or any experience distinguishing between the greater risks posed by the biggest banks relative to community banks. By nominating people who have a strong track record in these areas and who have a demonstrated commitment to not backing down when they find problems, the administration can show that it is taking the Fed’s supervision problem seriously. Nominating Wall Street insiders for the Board of Governors would send the opposite message."

 I have a few names in mind.

Did the New Deal help in the recovery?

I have posted on this before (e.g. here and here, but there is more). Here a short excerpt from Joshua Hausman dissertation, supervised by Barry Eichengreen and Brad DeLong. He suggests in this particular paper that the 1936 Veteran Bonus was essential for the expansion of consumption and growth in 1936. Table below show aggregate data. Note that most of the accelerated expansion is explained by consumption (one might add, investment is derived demand and follows the accelerator, but that's another discussion).

He says: "All this is not easily explained by factors other than the bonus. Monetary factors were if anything contractionary in 1936. Broad money supply growth slowed from 14 percent in 1935 to 11 percent in 1936. And in August 1936, the Federal Reserve raised reserve requirements."

Hausman correctly notices that monetary policy had little effect on the boom in 1936, which fits what Eccles thought about that, and also about the role of monetary policy in the 1937-8 recession. The recession was for Eccles caused by a fiscal contraction largely due to two factors, the new Social Security Law that went into effect, increasing taxes, without initially disbursing payments, and the end of soldier’s bonus payments, which would add support to Hausman's story. Yep, multipliers (effective demand) work.

Eileen Appelbaum on Private Equity & Retirement Savings

By Eileen Appelbaum

The decline in worker pensions creates a challenge for private equity (PE) funds. The funds currently get about a quarter of their capital from public-sector pension funds and another 10 percent from private-sector pension funds. But defined benefit pension plans, once enjoyed by most private-sector workers, have been largely dismantled by corporations. And public-sector pension plans have come under attack in recent years as part of a larger effort by politicians in some states to weaken or destroy public-sector unions. Private equity is worried that the goose that lays the golden eggs it relies on is on the endangered species list. With the industry so dependent on workers' retirement savings, its future growth prospects are likely to be tied to its ability to tap the estimated $6.6 trillion in 401(k) accounts.

Read rest here.