Cassidy on the productivity puzzle

John Cassidy is one of the best economic journalists around (together with Jeff Madrick probably). And not only because he has written about one of my mentors, Wynne Godley. In his last column he tackles the issue of productivity. And again I should say he is on the right track. He first gives a simple example of technological change from the donkey to the truck delivery system. Almost imperceptibly he tells you that you would change from one to another technology if: "you can find enough customers." Exactly, why would you invest in the new technology, the truck, if nobody is demanding more deliveries which would make the truck cost effective.

At any rate, he suggests three explanations for the current productivity slowdown (or the new concerns about it, since the Great Recession; this had temporarily vanished in the late 1990s when productivity picked up as a result of the so-called New Economy, i.e. information technology). The first, is that it's all a measurement problem, which in all fairness is not very credible. Then there is the Robert Gordon story that the third Industrial Revolution is less technologically dynamic. A supply-side story. And lastly, he hits the nail with the Kaldor-Verdoorn story. It is the slowdown in growth, mostly resulting from austerity. As the figure below shows productivity and GDP growth are highly correlated, and the question is whether you believe Gordon (with causality from productivity to GDP) or vice-versa, like Kaldor (Godley's intellectual hero, btw).

On Marx and other 19th century critical economists he might be wrong. But that is a topic for another post. On the calculations for Kaldor-Verdoorn go here (my method avoids the need to calculate potential GDP; on potential GDP see this interesting posts here, here and here by JW Mason).

Madrick on why Summers should NOT be appointed to the Fed

Nap time at the White House

After, Dean Baker and Tom Palley, now Jeff Madrick explains why Summers would not be good for the Fed. Jeff says more directly than others that "inflation is his big concern" and that "jobs will remain hostage to Wall Street needs if he is chairman." And by the way, Dean, Tom and Jeff well aware of the limits of Clintonomics (Rubinomics) and the unsustainable bubbles that drove the 1990s and 2000s booms (if we can call the Bush period a boom), while Summers was clueless.

Jeff also picks up the point about how New Kenesians are more Monetarists than Keynesians. He quotes Summers saying that:

"As for Milton Friedman, he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect."

The natural rate, a very anti-Keynesian principle, and Friedman's only really important contribution (a negative one, of course) is what underpins Summers concerns with inflation, at least from a theoretical perspective.

Thelma and Boehner or going off the fiscal cliff

Brad DeLong thinks we're going off the fiscal cliff. Brace yourselves then. What to expect, according to him:

"Running up to the explosion time of the austerity bomb has already reduced likely year-2013 real GDP growth from 3.0% to 2.5%. If no deal is reached until June 30 then our likely year-2013 real GDP growth rate will be -0.5%."

Unless I'm confused those look like the estimates of the Congretional Budget Office (CBO), run by

Douglas Elmendorf. According to the CBO:

"if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013."

So the fiscal cliff, which is more or less a decrease of US$ 600 billions in the projected deficit next year, mostly tax hikes with a modest reduction in spending of about US$ 60 billion (not considering feedback effects caused by increased spending as a result of higher unemployment), will lead to a mild recession.

So not the end of the world, but not good. But better than destroying social security for sure. And yes, by February we'll be talking about the debt ceiling again.

PS: Yep, I know, in the cartoon it is the Aztec Sun Stone not the Mayan calendar.

PS': On the broader problems with the fiscal cliff and why the consensus that we need fiscal adjustment of some sort is incorrect read Jeff Madrick's piece at the NYRB.