PRODUCTIVITY

Productivity growth is clearly slowing, and the key question is, is this a purely cyclical development or is it signaling a slowing in the long term trend growth rate.

Slowing productivity is a normal cyclical development and it is such a strong pattern, that historically, it has been a very good leading indicator. But this implies that we can not really determine if the recent slowing is just cyclical weakness or a trend shift.

To answer this question we need to look at indicators that either lead or determine productivity growth. It is a question economists have been researching for years

But clearly a major factor in productivity growth is the real capital stock per worker and it is generally widely accepted that this accounts for a quarter to half of productivity growth. Moreover, it also leads productivity growth by about a year.

There is also a long term relationship between trend productivity growth and trend growth in the real capital stock per workers as the following chart demonstrates.


From WW II until the late 1970s, early 1980s there was a very strong and relatively stable trend growth rate for both productivity and real capital stock per employee. But in the 1980s economic cycle growth in the real capital stock per employee stagnated, as it was still the same in 1990 as it had been in 1982. There was a cyclical bump in the early 1990s but this was driven more by a drop in employment then by stronger investment. With the capital spending boom of the late 1990s growth in productivity and the capital stock per employee surged again. But in recent years growth has stagnated again as since the Bush tax cut it has failed to grow.

This data on growth in the real capital stock per employee strongly implies that the recent slowing in productivity growth is not just a cyclical slowdown. Rather it looks like a shift to a slower growth trend driven by weak capital spending.

Obviously, given the limitations of blogging I can not get into much of a discussion of why growth in the real capital stock per employee did not grow in the 1980s or in recent years. However, these results are exactly the opposite of what the advocates of supply-side economics or republican trickle-down policies have promised. Maybe the simple answer is that there is no significant relationship between tax policy and capital spending.

But on the other hand since WW II the US has experienced good growth in the capital stock per employee except in the years when supply side economic policies were in place. I’ll leave it to the advocates of such policy to explain these discrepancies. However, I believe this is the fundamental or core reason why Cactus keeps finding that the economy does better under democrats than under republicans

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