Fall 2015 BPEA Th 4:30 PM: Ioannides and Pissarides seem to me to provide yet one more argument that the right policy in 2010 was Grexit so that external balance could be achieved via depreciation–that given structural impediments to productivity growth and the predictable consequences of austerity and internal deflation, nothing else had a chance of working.
So what was the plan and expectation back in 2010?
Fall 2015 BPEA 1:00 PM Th: I read House and Tesar. They say that attempting a 4%-point increase in government revenue as a share of GDP in Greece may well push you over the top of the Laffer curve:
We consider spending reductions or tax increases sufficient to generate an average flow increase in the primary balance of one percent of 2014 GDP… a quarter of the repayment required to fully meet the stream of debt payments…. We do not push the model to generate the full 4 percent increase in the primary balance as a share of 2014 GDP…. Policy shifts that satisfy (or attempt to satisfy) the full 4 percent increase could push capital and labor taxes into the downward sloping portions of the Laffer curve…
Does it not follow immediately that the excess burdens of a 1%-point increase are overwhelmingly large? It then follows that any tax increases at all are inadvisable. Thus the only policies that might possibly be advisable are those that cut spending.
Thus, if I were to set out to write House and Tesar’s paper, it would consist of that one paragraph–that Greece is near the top of the Laffer Curve, hence what it urgently does not need is any tax increases.
Then would come fifteen pages documenting this claim on which all else depends: that Greece is near the top of the Laffer Curve. Yet those fifteen pages are missing. Instead, we have fifteen pages confirming that when you are near the top of the Laffer Curve raising taxes for any purpose is a really bad idea.
Do we think Greece is near the top of the Laffer Curve? Why do we think that Greece is near the top of the Laffer Curve?
Must-Read: : The Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real: ”Our work has been widely cited…
…It has also attracted criticisms from those looking to deny the facts of inequality…. The data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers…. There are three important “wedges”… an overall shift in how much of the income in the economy is received by workers… the growing inequality [within] compensation… faster price growth of things workers buy relative to the price of what they produce….
Over the entire 1973 to 2014 period, over half (58.9 percent) of the growth of the productivity–median compensation gap was due to increased compensation inequality and about a tenth (11.5 percent) was due to a loss in labor’s income share. Less than a third (29.6 percent) of the gap was driven by price differences…. Gains to owners of capital and the improved bargaining position of capital owners are not adequately captured by this analysis of the wedges between productivity and median compensation… a wedge between pay and productivity caused by the improved bargaining position of capital owners… would likely be larger than the wedge made up of the loss of labor’s share of income in net domestic product…
Must-Read: As I see it, John Maynard Keynes was right when he wrote that “good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel!” The problem is that a good economist needs to be able to:
: Economists vs. Economics: “Navigating among economic models–choosing which one will work better…
…is considerably more difficult than choosing the right map. Practitioners use a variety of formal and informal empirical methods with varying skill. And, in my forthcoming book Economics Rules, I criticize economics training for not properly equipping students for the empirical diagnostics that the discipline requires. But the profession’s internal critics are wrong to claim that the discipline has gone wrong because economists have yet to reach consensus on the ‘correct’ models (their preferred ones of course). Let us cherish economics in all its diversity–rational and behavioral, Keynesian and Classical, first-best and second-best, orthodox and heterodox–and devote our energy to becoming wiser at picking which framework to apply when.
Productivity is a term bandied about by academics, policymakers, and pundits alike, yet most of us aren’t sure what it means—even though we know it when we see it. In common day usage, the term evokes images of workers diligently typing away at desks or laboring hard on the factory floor, as well as annual performance evaluations by the boss. These everyday views of productivity are accurate yet at best ephemeral and at worse confusing—especially when trying to sort out how productivity relates to overall economic growth in the United States.
But for economists focused on economic growth, productivity is the Holy Grail. It’s the source of long-run economic growth and steady wage gains for workers. And that’s why, in the wake of the Great Recession, there are fears that productivity’s best days are behind us. Has productivity growth declined? And if so, what’s the reason? Answering these questions requires a clear understanding of what we mean when we talk about productivity.
First, there is what economists call total factor productivity. This measurement of productivity originated in spirit, if not name, from the research of Nobel Laureate Robert Solow on long-run economic growth. Solow, now Professor Emeritus at the Massachusetts Institute of Technology (and a member of our steering committee), was trying to figure out how much increased savings in an economy could increase the pace of long-run economic growth. He found that savings don’t do much at all.
Solow parceled out the sources of growth to increases in the labor force (population growth), increases in capital (savings), and a residual term that captured all the unexplained part of growth. His calculations showed that this residual was the main driver of long-run economic growth. Faster population growth or higher savings might boost growth in the short term, but then per-capita growth would return its old rate. Only increases in Solow’s residual seem to increase the pace of long-run economic growth.
This residual is often called “technology,” but it’s also known as total factor productivity. The concept started out explaining output growth for countries, but it can be used to describe the performance of smaller economies such as cities or even individual firms. Total factor productivity tries to figure out how well a country, city, or firm combines capital and labor to create output. Whether changes in this efficiency of output come from technology, management practices, culture, or some other factor is a matter that economists fiercely debate. To put this back in the context of the Solow model, understanding what increases TFP growth is the same as understanding what’ll boost output per capita growth.
But, if you try to look up U.S. government statistics on productivity, you’ll likely find data on labor productivity. Labor productivity is what it sounds like—a measure of how productive labor is. More specifically, it shows how much output is created for every hour of work done by a laborer. Take the amount of output produced, divide it by the number of worker hours it took to create the output, and the resulting number is your labor productivity. Importantly, though, labor productivity also is derived from total factor productivity. Take the growth in total factor productivity, add the increase in the capital workers can use from investments and account for changes in the kinds of workers in the labor force (including increases in educational levels and demographic changes), and you have the increase in labor productivity.
A debate about the source of long-run economic growth and wage growth would be important in any context. But it is especially relevant today given the slowdown in productivity growth over the past decade compared to growth levels seen before a burst in productivity growth in the late 1990s and early 2000s. Since 2003, labor productivity has slowed considerably from its pace during that period and compared to earlier periods in the postwar era. According to data compiled by John Fernald, an economist at the Federal Reserve Bank of San Francisco, trends in labor productivity look something like this:
Why these wide swings in labor productivity? A look at total factor productivity growth provides some clues. Here are the trends in total factor productivity over the same periods:
Other contributors to labor productivity mostly increased over these periods. Due in part to rising education levels, growth in what Fernald calls “labor quality” went from 0.27 percent in 1948-1973 to 0.43 percent in 1973-1995. Labor quality growth ticked down just a bit during the 1995 to 2003 period to 0.40 percent and fell quite a bit more, to 0.24 percent, during the 2003 to 2007 period. It has since jumped up to 0.59 percent in the 2007 to 2013 period.
Similarly, more capital was a contributor to the increase in labor productivity growth, with the growth rate of capital deepening rising from 0.57 percent in the 1973 to 1995 period to 1.17 percent annually from 1995 to 2003. It’s fallen since then, averaging 0.61 percent during the 2003 to 2007 period and falling again to 0.49 percent during 2007 to 2013. (See Figure 1.)
Figure 1
As these data show, we really can’t blame the slowdown in labor productivity specifically on declines in capital accumulation, investment rates, or a deterioration in labor quality. According to Fernald’s decomposition, something else happened that caused a decline in the underlying pace of total factor productivity. What exactly could be the cause of this decline?
A recent working paper by Stanford University economist Charles Jones is helpful for thinking about this conundrum. Jones splits up total factor productivity into two factors. The first is the contribution of technology or knowledge to the pace of economic growth. Call it the stock of human knowledge. The second factor is far more nebulous. Jones calls it “M.” He’s very upfront about the fact that “M” could very well could stand for “measure of our ignorance” about the sources of growth. Jones does venture that given new research on productivity, that “M” might also be called “misallocation.”
Misallocation stories about productivity are less about the need to spur new innovations and more about understanding that many firms and individuals are already quite productive or have the ability to be more productivity if put in the right situation Jones highlights one paper that shows how women and people of color’s entrance into higher-skill occupations provided a significant boost to economic growth. That’s a matter of the misallocation of society’s workforce. The same phenomenon is evident in another study that shows the potential gains from allowing more workers to live in high-productivity cities.
There’s a similar story when it comes to firms. Research from the Organisation for Economic Co-operation and Development shows that there are firms operating among its 34 developed and rapidly development member nations that have quite high total factor productivity growth. The problem is that the insights and innovations from those firms haven’t spread to the rest of the firms.
What’s broken that transmission mechanism from these vanguard firms to the rest of the population? The decline in the rate of new business formation could be a likely candidate. If fewer innovative start-up firms are being created, then it makes sense that it would take longer for new ideas about how to run companies to diffuse throughout these economies. In the United States, the rate at which new firms enter the economy has been on the decline since the late 1970s.
But what explains the slowdown in the start-up rate? That isn’t clear, but some research by economists Ian Hathaway of Ennsyte Economics and Robert E. Litan at The Brookings Institution indicates that the slowdown in population growth and an increase in business consolidation could be the culprits. One of the reasons the number of public companies is on the decline in the United States is because of increasing mergers and acquisitions activity.
Since the late 1970s, overall productivity gains haven’t translated into broadly shared gains for the entire workforce as compensation inequality has increased. And since 2000, the gains from productivity across the U.S. economy are accumulating more and more toward the owners of capital instead of compensation for workers, as the labor share of income has been on the decline. Possible links between less equitable economic growth and declining productivity growth need to be explored because the pace of productivity growth sets the bound for how much standards of living can rise.
Must-Read: What is the technocratic economic–not the “the unemployment rate is normalizing so the interest rate should be normalized too” argument? For a person to be lying in a bed 24/7 is not normal. But if they have a broken leg you don’t make them normal by making them get up and walk around.
: Why the Fed Must Stand Still on Rates: “The case against a rate increase has become somewhat more compelling even…
…than it looked two weeks ago…. First, markets have already done the work of tightening…. Second, the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressures…. Third, the case for concern about inflation breaking out is very weak. Market based expectations suggest that inflation over the next decade on the Fed’s preferred core pce basis is near record lows and well below 2 percent. The observation that 5 year inflation, 5 years from now is expected to be below target calls into question arguments that current low inflation is somehow transitory….
Fourth, arguments of the “one and done” variety or arguments that the Fed can safely raise rates by 25 BP as long as it’s clear that there is no commitment to a series of hikes are specious. If as some suggest a 25 BP increase won’t affect the economy much at all, what is the case for an increase? And when the same people argue that 25 BP will have little impact and that it is vital to get off the zero rate floor, my head spins a bit. In a highly uncertain world, the Fed cannot be both data dependent and predictable…. I understand the argument that zero rates are a sign of pathology…. The problem is that the case for hitting the brakes in an economy with sub-target inflation, employment and output is not there; regardless of whether the brakes are to going to be pressed hard or softly, singly or multiple times…. Policymakers who elevate credibility over responding to clear realities make grave errors….
Fifth, I believe that conventional wisdom substantially underestimates the risks…. Not a single post war recession was a predicted a year in advance…. If history teaches anything it is that financial interconnections are pervasive and not apparent till it’s too late…. Now is the time for the Fed to do what is often hardest for policymakers. Stand still.
Must-Read: Nate Silver calls out David Brooks and George Packer and Jonah Goldberg. May I say that the New York Times made a major mistake when it decided to let Nate Silver but not David Brooks go? And that the New Yorker would be well-advised to give Nate Silver George Packer’s inches?
: Stop Comparing Donald Trump And Bernie Sanders: “A lot [David Brooks] of people [Jonah Goldberg] are linking [George Packer] the candidacies of Bernie Sanders and Donald Trump…
…under headings like “populist” and “anti-establishment.” Most of these comparisons are too cute for their own good…. You can call both “outsiders.” But if you’re a Democrat, Sanders is your eccentric uncle…. Trump is as familial as the vacuum salesman knocking on your door…. Sanders is campaigning on substantive policy positions, and Trump is largely campaigning on the force of his personality…. Sanders is a career politician; Trump isn’t. Let’s not neglect this obvious one. Bernie Sanders has been in Congress since 1991, making him one of the most senior members of Congress; Trump has never officially run a political campaign before…. Sanders holds policy positions of a typical liberal Democrat; Trump’s are all over the place…. Sanders’s support divides fairly clearly along ideological and demographic lines; Trump’s doesn’t…. fight. Clinton’s position relative to Sanders is analogous to the one Al Gore held against Bill Bradley in the 2000 Democratic primary. Sanders’s campaign also has parallels to liberal stalwarts from Howard Dean to Eugene McCarthy; these candidates can have an impact on the race, but they usually don’t win the nomination…. Trump is engaged in an attempted “hostile takeover” of the Republican Party…
Must- and Should-Reads:
Must-Read: I used to think that Jason had this right. I am now worried he doesn’t. Barry Eichengreen keeps arguing that the memory of the lessons of the Great Depression was strong enough to halt the crash, but not strong enough to get policies adopted to spur the recovery. Thus, Barry argues, it may well be that–somewhat paradoxically–the fact that a second Great Depression was avoided in the short run may well mean that the longer-run consequence will be that 2007-9 will cast a larger and darker economic shadow on the future of the global economy than was the economic shadow cast by 1929-33.
Jason Furman: It Could Have Happened Here: The Policy Response That Helped Prevent a Second Great Depression: “The achievement of avoiding a second depression is not one to be minimized…
…The similarities between macroeconomic variables during the onset was in many respects worse than in 1929 and 1930, but the policy response and the resulting outcomes could not have been more different. As difficult as it was losing hundreds of thousands of jobs per month, the 20 percent-plus unemployment rates of the 1930s should not be forgotten. As United States–and global–economic policy shifts its focus from crisis response to continued structural reform, it will be important to learn from what has worked and what has not as we continue to encourage more, shared growth in the twenty-first century.