Monday, September 3, 2012

Productivity slowdown and and the return of secular stagnation

Robert Gordon has recently argued that secular stagnation is a likely possibility. Alvin Hansen, one of the most influential of the neoclassical synthesis Keynesians, was the father of the idea. For Hansen the reasons were associated with declining population growth, the disappearance of labor-saving technology, and the closing of new frontiers.

His views were published in a famous book titled Full Recovery or Stagnation?, in which he argued that investment opportunities were lacking. Since Keynes theory was also dependent on the expansion of autonomous investment, and Hansen was a Keynesian, the stagnationist thesis was considered a Keynesian theory. All in all, Hansen's views are not very different from Gordon's position. However, it is important to note that Gordon presumes that productivity determines growth, which is not a very Keynesian proposition.

The table below shows the rate of labor productivity growth from 1948 to 2011, and the two sub-periods that start with the productivity slowdown in 1973. Note that productivity growth follows the rate of growth of output (GDP).
This is not the Okun's Law discussed before, since these are averages that eliminate the cyclical relation between productivity and growth. In other words, the relation above is about the trend, something referred to as the Kaldor-Verdoorn Law (KVL). KVL suggests that productivity growth is not the cause of growth, but the result, and it assumes that growth is demand led, in Keynesian fashion. This would suggest, at least from the technological point of view, that there are less reasons than Gordon suggests for his pessimism. Of course one may very well think that stagnation in the US will result from the political forces that do not allow demand expansion. And yes everything hinges on the thorny issue of causality.

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