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EJ
08-18-06, 05:56 PM
Productivity or Credit? What's Driving Economic Growth?

August 20, 2006

As a fresh recession looms, debate that's been going on for years on the nature of productivity growth is coming to a head.
Economic juggernaut may face lower speed limit (http://msnbc.msn.com/id/14396307/)
Aug 17, 2006 (MSNBC)

The US productivity "miracle" – one of the defining economic developments of modern times – is looking a shade less miraculous than it did a month ago.

Following a series of revisions to recent historic data, economists are pondering whether to reduce their estimates of the speed at which the world's biggest economy can grow without generating inflation. Many have done so already, cutting their assessments of US potential growth by about 0.25 per cent. This may not sound a lot but, compounded year after year, it adds up to a significant loss.

In many ways, the truly remarkable part of the productivity miracle began in 2001, when the dotcom bubble burst. Rather than slow down, as in past downturns, US productivity growth accelerated as companies squeezed greater output from bubble-era investments – and continued to do so as growth picked up.

"Looking back at the late 1990s, it was more of an investment boom and less of a productivity story than we thought at the time," says Bart an Ark, a professor at Groningen university in the Netherlands and director of international economic research at the US Conference Board. "From 2001 onwards it is not an investment story – it is a productivity story."
Productivity is the measure of economic output per unit labor. Here's the chart since 1958, recessions in pink.


http://www.itulip.com/images/productivitygrowth1958-2006.gif


Chart 1


One way to increase productivity is to use more machines to make workers more efficient. Another way is to reduce the number of workers but keep output growing.

On one side of the 2001 - 2005 US productivity "miracle" argument are those that say computers have made us all more efficient. On the other side of the argument are guys like Prof Gordon of Northwestern who, "...puts greater weight on the natural limits to an 'explosion' of brutal corporate cost-cutting following the bursting of the stock market bubble. These productivity increases, he argues. were not really caused by IT, even though they were in part enabled by it."

This latter view conforms to experience. Most readers can attest that until recently, the productivity miracle appeared to result from firms laying off a lot of workers and demanding that the remaining workers either pick up extra duties from the folks in the unemployment line... or join them, and for a long time. The period also happened to be one of the few when getting sacked meant staying out of work for a long time. Not since the near depression conditions of the 1980 to 1983 recessions has the median duration of unemployment been so high as it was between 2000 and 2003.


http://www.itulip.com/images/mediandurationunem1967-2006.gif


Chart 2


How's that for motivation to put out something extra for the boss?

There are two challenges in determining the influence of producitivity growth to economic growth during the 2001 to 2006 productivity "miracle" period.

First, we don't know how to measure it. This is put well by William Poole, President, Federal Reserve Bank of St. Louis back in 1999 (http://stlouisfed.org/news/speeches/1999/10_26_99.html):
"Productivity growth is a terribly important subject for the United States, indeed for every country. But this is not an easy subject. The puzzles of the 1970s slowdown in productivity growth have not been resolved. The puzzles of the 1990s increase in productivity growth seem only to deepen with further research into what is going on. It is amazing, but still a fact at this time, that most of the reported increase in productivity growth can be attributed to the computer-producing industry and little to the computer-using industries--that is, the whole rest of the economy."

"To understand just how amazing this puzzle is, I'll put the point this way: All, or most--depending on your choice of expert--of the increase in productivity growth for the entire U.S. economy can be attributed to a single industry--computer manufacturing--that amounts to about 1 percent of the economy! That is a truly remarkable finding, and it really doesn't matter much whether the truth is 'all' or "most."
Second, the biggest challenge in asserting that productivity has been the primary economic growth driver during the 2001 to 2006 period is that this factor has to be measured against the impact of credit growth. While productivity was reported as growing by approximately 20% over the period (see Chart 1 above), credit and debt growth grew much more dramatically (http://www.moneyweek.com/file/16731/why-the-us-credit-machine-is-running-amok.html): "Compared with an increase by $827 billion in 2000, credit and debt growth has quadrupled. Total outstanding indebtedness rose to $41.8 trillion, equal to 334% of nominal GDP and 376% of real GDP. In the first quarter, $4.30 of additional debt was added for each dollar added to nominal GDP growth and $7.50 additional debt for each dollar added to real GDP growth. Until the late 1970s, this credit-to-GDP ratio had held at a steady rate of 1:1.4 for over 30 years."

Perhaps the mystery of slow productivity growth in the 1970s and the rise in credit and productivity growth that followed may be solved by the hypothesis that the two are related. They sure look that way. I call your attention to two periods of apparent correlation between productivity and bank credit, blips with a six month time lag in 2001 and 2003 in the Chart 3 below.


http://www.itulip.com/images/producitvityvsbankcredit.gif


Chart 3


Is what is measured as "productivity" a function of bank credit or the other way around?

In any case, whether working better due to computers, working harder with the threat of long term unemployment hanging over workers' heads, miscalculation of the measure of productivity itself, or the fact that what we are measuring as "productivity" may be a product of expanded credit, it's reasonable to worry that the so-called US productivity "miracle" may be a one time, non-repeatable event. Productivity increases from layoffs produce declining marginal returns on labor as labor is further reduced; when unemployment declines, so may productivity. Computer systems also do not continuously improve productivity but tend to do so dramatically when they are introduced and contribute incrementally to productivity thereafter. Finally, if what is measured as productivity has become highly correlated to bank credit, it follows that a decline in one may accompany a decline in the other, and both are at all time highs.

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jk
08-18-06, 10:03 PM
2 points-

the measured productivity increase from the i.t. industry, mentioned above, is not in its benefits for other industries. it is higher productivity in the production of computers and other i.t. components themselves. also, i'm fairly sure that this "productivity" is based on hedonically adjusted computer production. so the worker is much more "productive" assembling a desktop with a 2ghz chip this year in place of a desktop with a 1.3ghz chip last year.

second, and this is from a piece of john hussman's which i highly recommend for reading in its entirety at www.hussmanfunds.com/wmc/wmc031110.htm (http://www.hussmanfunds.com/wmc/wmc031110.htm)

Unfortunately, the “productivity miracle” is also partly a statistical quirk. A significant portion of what we “import” from foreign countries actually represents intermediate goods produced by foreign subsidiaries of U.S. companies, or companies formed by direct U.S. investment into those countries. Think about this for a second. We import the same intermediate goods we would have manufactured at home, but at cheaper prices (meaning that the deduction to GDP on account of imports will generally be proportionately smaller than the corresponding loss in U.S. employment). Yet when we turn around to calculate productivity, we don't count the foreign jobs used to produce that output. As Fabrizio Galimberti has noted in the Economist, foreign outsourcing has the effect of artificially raising productivity figures because subtracting imports from GDP does not adequately correct for their impact on final output, yet foreign labor is not counted, so measured output per worker increases.

The net effect of all this is that the U.S. “productivity miracle” is almost entirely dependent on growth in U.S. imports and foreign labor outsourcing.

I had a lot of fun putting the following chart together (any use of this should include “Source: Hussman Funds”, thanks). Since productivity is cyclical, I used the 5-year growth rate of non-farm productivity, which smooths out short-term fluctuations. To get at the idea of import growth over and above the growth in overall consumption, the other line is the 5-year U.S. import growth rate over and above the growth rate of personal consumption expenditures.

Very simply, import growth captures both the “true” part of productivity growth (since increased capital investment typically requires an expanding current account deficit) as well as the illusory part of productivity growth (resulting from the failure to account for foreign labor input in the productivity numbers). In both cases, it is misplaced optimism to expect rapid and sustained growth in U.S. productivity when the U.S. current account is already at a record deficit.

http://www.hussmanfunds.com/wmc/improd1103.gif

the import growth which hussman tracks is of course related to domestic credit growth. also the intermediate goods argument boils down to this: lay off the american producers of the intermediate goods, import the equivalent intermediate good at a lower price, sell the final product for its pre-existing price. voila! the american producer of the final good has added more [measured] value [=final price-intermediate price] and so has been more productive! hoorah!

Finster
08-19-06, 11:55 AM
The "productivity" paradigm is mostly a canard promoted by the Greenspan Fed to excuse and conceal its inflationary policies. Real GDP is calculated by taking nominal GDP and backing out inflation. If you understate inflation, then real GDP appears to be growing faster than it is, and that growth is then chalked up to "productivity". Then the "productivity" is in turn used to promote the notion that inflation is lower than it is and consquently as a rationalization for more profligate monetary policy.

Corporate Plebe
08-21-06, 02:52 PM
The following quotes come from The Money Masters documentary website. It seems they would argue it is Credit that drives the economy, not Productivity. Does today's Quick Comment support their contentions? Where do these founding fathers (assuming they did indeed say and think the below) fit on today's poll concerning politcal persuasion?
Best,

Corporate Plebe -- who BTW, has experienced all the labor effects mentioned in this Quick Comment, and who now works in sales/marketing attempting to sell the potential "productivity" of business software.

http://www.themoneymasters.com/


If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson

History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. -James Madison

If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. -Andrew Jackson

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham Lincoln
Despite these warnings, Woodrow Wilson signed the 1913 Federal Reserve Act. A few years later he wrote: I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men. -Woodrow Wilson

bart
08-21-06, 03:00 PM
The "productivity" paradigm is mostly a canard promoted by the Greenspan Fed to excuse and conceal its inflationary policies. Real GDP is calculated by taking nominal GDP and backing out inflation. If you understate inflation, then real GDP appears to be growing faster than it is, and that growth is then chalked up to "productivity". Then the "productivity" is in turn used to promote the notion that inflation is lower than it is and consquently as a rationalization for more profligate monetary policy.

I don't recall ever being set up any better for a chart... ;-)

http://www.nowandfutures.com/images/real_gdp_williams.png

Finster
08-21-06, 07:52 PM
I don't recall ever being set up any better for a chart... ;-)

Excellent! Now by "GDP minus CPI lies" do you mean GDP adjusted by the CPI, or by the CPI itself adjusted for CPI lies? Regardless, this is a chart that should be prominently displayed along with every GDP news release in every newpaper that covers it, not to mention CNBC, Bloomberg, et al. It neatly answers the questions they keep asking about how it is, that if the economy is doing so well, people don't feel like it is.

bart
08-21-06, 08:59 PM
Excellent! Now by "GDP minus CPI lies" do you mean GDP adjusted by the CPI, or by the CPI itself adjusted for CPI lies? Regardless, this is a chart that should be prominently displayed along with every GDP news release in every newpaper that covers it, not to mention CNBC, Bloomberg, et al. It neatly answers the questions they keep asking about how it is, that if the economy is doing so well, people don't feel like it is.

Thanks Fin! :-)

Its the second one - I took the CPI adjusted by the public Williams figures and subtracted it from nominal (actual raw dollar) GDP. Its been one of the things on my backlogged list of things to do and I finally got to it last weekend.

If you (or anyone for that matter) have an alternate description for the legend that you think would make it clearer, I'd sure love to hear it.

jk
08-21-06, 10:42 PM
Excellent! Now by "GDP minus CPI lies" do you mean GDP adjusted by the CPI, or by the CPI itself adjusted for CPI lies? Regardless, this is a chart that should be prominently displayed along with every GDP news release in every newpaper that covers it, not to mention CNBC, Bloomberg, et al. It neatly answers the questions they keep asking about how it is, that if the economy is doing so well, people don't feel like it is.

finster, you missed an opportunity to point out that the "actual dollars" in those charts should then be multiplied by the fdi to get real real [that's not a typo] gdp.

Finster
08-22-06, 06:59 PM
finster, you missed an opportunity to point out that the "actual dollars" in those charts should then be multiplied by the fdi to get real real [that's not a typo] gdp.

Bart's chart is quite correct the way it is. It would not have been improved by multiplication through with the FDI. In fact, that would have added a distortion by double-counting inflation. Note Bart's explanation above; he adjusted the nominal GDP using the Williams CPI to get the real GDP. The FDI could be used as an alternative inflation index, but you would not want to layer it on top of the Williams measure.

jk
08-22-06, 09:28 PM
Bart's chart is quite correct the way it is. It would not have been improved by multiplication through with the FDI. In fact, that would have added a distortion by double-counting inflation. Note Bart's explanation above; he adjusted the nominal GDP using the Williams CPI to get the real GDP. The FDI could be used as an alternative inflation index, but you would not want to layer it on top of the Williams measure.

got it. thanks.

akrowne
08-23-06, 02:17 PM
It seems that due to the monetary system, even real productivity increases become "bad" through the pyramiding of money/credit.

I've expanded on this here:

http://www.autodogmatic.com/index.php/sst/2006/08/23/productivity_growth_credit_and_inflation