Confusion over low productivity continues… sigh
Laurence Ball wrote an article called The Great Recession’s Long-term Damage. He writes about how potential output has been reduced in many countries after the recession…
“Through what mechanisms do recessions reduce potential output? This question is addressed in a number of recent papers (see Ball 2014). While the results vary, it appears that recessions sharply reduce capital accumulation, have long-term effects on employment (largely through lower labour force participation), and may slow the growth of total factor productivity. This last effect is poorly understood – one possible factor is a decrease in the formation of businesses with new technologies.”
The 3 causes that he lists…
- reduced capital accumulation
- low labor force participation
- slow growth of total factor productivity
can all be explained by lower effective demand. Low demand reduces incentive to invest in capital when low demand reduces the need for employing more labor and capital. So low effective demand explains the first two points.
What about productivity? Is it really poorly understood?
Low effective demand limits productivity. See graph above. This idea is new but even as the world does not understand why productivity is not rising, an answer must exist. The pattern in the graph above is clear. When real output per labor hour reaches the effective demand limit per labor hour, productivity stalls.
The problem is that economists do not have a model for how effective demand manifests. (see here for one model)
Related Articles
Lambert, Edward. Relax DeLong & Krugman… Productivity advances will appear when there is demand space. Effective Demand blog. December 3, 2013.
Lambert, Edward. Productivity really is Demand Constrained. Effective Demand blog. July 27, 2013.
And a related point. Potential output is an accounting identity, computed recursively using inflation over time. So the author finds that all the productivity and pricing puzzles are resolved all at once during the down turn. That tells us nothing about potential output except that it is recomputed on a periodic basis.
That’s rather interesting since total factor productivity rose during the Great Depression. Granted, there was a lot more government stimulus and meddling in the economy back then. (There is a book, Field’s ‘A Great Leap Forward’ about this.)
The 1930s introduced a lot of systemic production enhancements. Railroads redid their regional management to emphasize end to end transit, not simply getting cars out of one’s region. Efficiency experts like Gilbreth and design experts like Dreyfus changed how products were made and could be used. There was a proliferation of card based information systems for tracking products and orders.
I’m guessing that there is a lot of hidden restructuring going on, but we aren’t going to see it until the government kick starts the economy. Right now the productivity improvements are hidden by slack demand.
Kaleberg,
Recessions are good times for increasing productivity because effective demand is so high. I realize actual demand is low but effective demand is high. So an increase in productivity during the GD is no surprise.
Right now there is hidden productivity waiting to show itself. But the govt kick starting the economy will not release it. You need spare capacity to widen as in an economic contraction. Then effective demand rises giving space for productivity increases.