Thoughts on Summers on the Productivity Slowdown
I received this *.pdf and an invitation to read it from my colleague and sometimes co-author Alessandra Pelloni. I had a lot of thoughts which I post here as they can’t do any harm.
Two comments before the jump and 5 after the jump.
I think it will be hard to massage the data away from the conclusion that
when there are recessions, subsequent output growth is lower. The
question is, is the relationship best thought of as causal. After all, if
productivity slowed down, you might expect investment to slow down,
you might expect the stock market to go down. And so, if events were
happening that were reducing the underlying rate of growth, and people
came to realize that those events were happening, you might expect the
economy to go into recession.
And so the question where there’s certainly much more room for argument
is whether the relationships I described are causal. And here, there’s no
God’s truth. We don’t get to contrive recessions to do a controlled
experiment on the question. Blanchard and I do what I think is the sensible
way to approach the question, which is we look at recessions with
different causes. We look at recessions that are associated with tight
money to reduce inflation. That seems like a relatively pure case of a
demand side reduction. We look at recessions that follow the bursting of
bubbles. We look at other recessions not associated with those kinds of
events. We look at recessions associated with fiscal contractions. We look
at recessions associated with credit contractions.
Separately, I have looked at declines and output associated with fiscal
contractions and what has happened to potential GDP revisions in
response to those contractions and I would say that a summary of that
research is that economic logic is borne out the apparent hysteresis
estimate from a demand side recession is lower than the apparent
hysteresis estimate if you look
this is very interesting. I haven’t read the paper which he cites . I agree with Summers that more better be done on this topic.
I have some thoughts. One is housing again. Housing investment is just as much a part of aggregate demand as investment in plant and equipment. However, it has less to do with labor augmenting technological progress. I think conceptually it is more like durable goods purchases for an extremely extremely durable good. A housing bubble bursting is different from a high-tech bubble bursting.
Another is what about long term effects of periods of extremely high demand (also known as wars). Wars are not caused by good technological progress. This is government spending and X and works better for military spending than for total spending.
Another is what happens to estimates of the natural rate of unemployment. In theory it shouldn’t depend on productivity growth. The original story by Friedman referred to labor market institutions. The old Blanchard and Summers 1986 hysteresis paper was about employment not output. A productivity slowdown might cause a recession (if as argued firms don’t notice and keep on investing a lot, then suddenly cut investment when they realize). It should not cause elevated unemployment a decade later.
Suddenly loose monetary policy. After the stock market crash of 1987, the non independent Bank of England (aka Thatcher) panicked and loosened monetary policy. It turned out that UK unemployment didn’t have to be high after all.
I’d say the practical proposal here is to look at employment and unemployment not GDP.
Briefly, I have a kind of intermediate position on QE and negative interest
rates and stuff. [skip]I am of a view that is in a sense intermediate. I believe that if the only
game in town is monetary policy, the risks of excessive unemployment
hardening in to structural non-employment and structural output losses
exceed any risks associated with financial instability. And so, when the
only game in town is monetary policy, I tend to be supportive of finding
ways for monetary policy to be expansure (sic).But I take very seriously, unlike some of my friends who share that view,
the ideas that sufficiently low rates – A, are of questionable efficacy in
stimulating investment; B, the investment they stimulate is likely to be of
dubious quality. After all, think about the investments you would do with
a 1.5% tenure rate but you would not do with a 1% tenure rate, what is
their likely quality to be?
I agree that low interest rates don’t have that much effect on investment really and that they cause investment with a small effect on labor productivity. But really, the story is much simpler than the one Summers tells. Interest rates mainly affect residential investment. It isn’t easy to get a negative term on a real interest rate (achieved expectable whatever) using business investment or non residential fixed capital investment. This makes sense. One hint is that it is one of the many bees in Krugman’s bonnet. He is often right.
I don’t think that even larger houses would cause higher US labor productivity. I think US houses are plenty large enough already. In any case, the claim about the magnitude of the effect of interest rates on investment is testable. I think there is a lot of sloppy thinking (on the web at least) in which the obvious effects of monetary policy in the early 80s (involving changes of interest rates on the order of 1000 basis points) implies that a change of dozens of basis points is reason to get excited and a possible hypothetical change of say around 100 is the key issue.
So anyway, I sure agree with Summers on this one. Unconventional monetary policy is better than nothing but not a decent substitute for fiscal stimulus.
On the other hand, while I think his point about the low quality of investment which is made only if the required return is tiny is valid, actual required returns are much greater than the risk free interest rate. Market risk premiums are high. The one relevant to society is the sum of two terms. The first, subtraction of the expected value of losses due to default is really a correction to expected returns (it appears as part of the risk premium of a corporate bond but it is part of the expected return not a high expected return compensating risk). The second is the contribution to aggregate risk if, say, a bubble bursts and there is a recession. It is possible to estimate the second term (as in Mehra and Prescott). It is tiny compared to actual average returns on risky assets minus the risk free rate. It is very possible that socially desirable investment will only be made if the risk free real rate is negative. This is consistent with dynamic efficiency and everything. I agree with Summers’s conclusion, but he is using a bit of clever rhetoric discussing the interest rate not the many different interest rates.
Summers’s practical practical proposal is to invest more in infrastructure now that interest rates are very low and demand is slack (and would be slacker at normal real interest rates). I totally agree with Summers (and many others including the above mentioned Alessandra Pelloni) and we all know it isn’t going to happen.
I want to talk to you about what is to me, the big puzzle in
all of this, having to do with the fairly compelling evidence of productivity
slowdown and what seems to me to be the equally compelling evidence of
substantial dis-employment effects in the economy.
[skip]
And yet, if technical change is a major source of dis-employment, it is
hard to see how it could be a major source of dis-employment without also
being a major source of productivity improvement. In part, if the
technology is replacing people that means that productivity should be
expected to go up at least if you measure simple labor productivity. And if
more of that is happening than used to be happening, then you would
expect productivity to be rising more rapidly than it used to be rising.
Summers asked how can there be reduced employment/population and slow productivity growth ? Capital and skill biased technological progress can explain the first, but where is the resulting productivity ? Here Summers doesn’t mention the supply of workers with different levels of formal education. In the past (up to 1973 when the draft was eliminated) there was rapid increase in US educational enrollment. This increase slowed dramatically. This naturally explains both problems & solves both puzzles. A lower rate of human capital accumulation should cause lower productivity growth. A gap between demand for human capital and the low human capital of lots of people can explain why their real wages have stagnated (or fallen) and why fewer of them are employed.
Now for one thing Summers knows about this (he talks to other Larry = Larry Katz). He left it out to make his story more interesting.
Missmeasurement
I am struck that there is likely what may well be an increase in
unmeasured quality improvement. To take the first example that comes to
mind and I’ll do an experiment with this group. I’ve done this experiment
with other groups – which would you rather have for you and your family,
1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices? How
many people would prefer 1980 healthcare at 1980 prices? How many
people would prefer 2015 healthcare at 2015 prices?
There are a fair number of abstainers but your answer was pretty clear.
What does that mean? That means that healthcare inflation was negative
from 1980. That is very differe
2) miss measurement. I am sure this is an important issue. I very much like the health care spot survey (but his audience is relatively rich). Here the point is that the official price indices are not affected by the introduction of new goods. It is assumed that a new good is a perfect substitute for an old good and people are indifferent between buying it at its first ever price and buying old goods at their current price. This is silly. It matters a lot. One could also say that if a good or service doesn’t exist at all its price is infinite (you can’t buy it for any amount of money). This means that the cost of, say, a hip replacement has declined 100% of the old price = infinity % of the current price. People just couldn’t buy the current average consumption bundle in 1973.
1% a year compounds to a huge amount.
If you think there is mismeasured productivity growth – so if you
think the people who say, you know, there is a line of thought that likes to
say: “Well, GDP growth’s been slow but that doesn’t really mean much
because the labor market is tight and so maybe the GDP growth has been
mismeasured.” If you want to go down that line of argument, you have to
say: “Well the inflation rate is 1 percentage point less than we thought we
are.” And that those raise a question which is if the inflation rate is 1%
less than we are measuring it, why would we be thinking about tightening
monetary policy?
3) so inflation is 1% a year lower — this matters a lot if you care about the 2% inflation target. So ? 2% is silly in any case. There is nothing really special about the inflation rate (the shoe leather costs of reduced real balances at 4% are trivial as they are at 2% while the theoretically ideal rate in an absurd model with full employment and price flexibility is -r %) . Still a good debating point in a good cause.
On miss measurement in general
Summers needs not just that inflation is over estimated but that the difference between measured and true inflation has increased. He doesn’t argue this in his talk. He didn’t ask, for another 30 year interval, if people would prefer 1970 health care at 1970 prices or 1940 healthcare at 1940 prices. I’d say that they’d go for the one which includes penicillin — oh and vaccinations for all sorts of things which were terrible threats in 1940. He is absolutely right that the value of improved health care is huge compared to the measured value (measured at cost). But it is just silly to think that the rate of progress has increased in the USA (look at life expectancy — oh hey he mentioned that).
I see he comes back to this in response to John Fernald’s question. I get his explanation that the miss measurement problem should have increased as the share of sectors where measurement is hard (that is services) has increased. This argument makes a lot of sense. It can be addressed by looking at data disaggregated just at tiny bit. The fact is that measured manufacturing productivity has the same general pattern as overall business productivity (I am using FRED which for some reason has manufacturing only after 1987). Summers (that is a research assistant) can make up constant measurement (of growth rates) error assumptions for each sector and calculated how the shift in GDP composition affects the aggregate measurement error. I am sure he is right about the sign of growth measurement error and the sign of the change in the error. I think part of the puzzle remains.
When demand is slack , everyone devotes lots of effort towards looking busy. That’s not good for productivity.
When demand is strong , everyone is actually , truly busy. That’s good for productivity.
Isn’t the fact that every major economy is suffering from slack productivity post-crisis kind of a clue ? Sweden is going to 6-hr work days. Who doesn’t think their productivity numbers will perk up ? It’s a gimme , right ? ( Assuming , that is , that current income , and thus demand , is maintained. )
Well gentlemen when you restricted the growth of the number of people buying. Then all these companies can do to rise stock price is stock buy back.
Dose anyone see a positive outcome to an undisciplined capitalist system?
WE are about to loose our sovereignty to the corporate dictators under the current TPP plan and nobody is talking only the alternative media. The “New World Order” will become a technocracy where under the corporate run tribunal system, controlled by them there will be no rule of law ,no court or legal retribution or reprisal from any nation. You and I will not even be able to protest or boycott for fear of being sued for interfering with their profits. Why is nobody talking about this in the main stream media? Because they and the US congress and senate have all been bought off not to talk about t…IMHO.
Total gov’t, private health care and education, and debt service in the US is an equivalent of 54% of GDP and 75% equivalent of private GDP. These sectors combined are now a net cost to the rest of the private sector.
The resulting drag on private productivity from the associated prohibitive costs are exacerbated by (contribute to) a record low for labor share and the coincident extreme wealth and income concentration to the top 0.001-1% to 10%, and the resulting inequality.
Moreover, extreme inequality results in part in hoarding of overvalued financial assets at no acceleration of velocity in the economy.
Additional QE (primarily to credit primary dealer banks to fund fiscal deficits to prevent nominal GDP from contracting) to encourage and sustain financial asset bubbles with the objective of achieving a dubious “wealth effect” further exacerbates the pernicious effects of inequality.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2DH8
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2DHj
But these conditions were predictable long ago. The total US debt to private GDP from the 1970s to early 1980s grew to achieve an order of exponential magnitude leading to the GFC. Since then, debt to private GDP peaked and has modestly declined while the Fed printed more than $3 trillion and the US gov’t borrowed and spent a cumulative $8 trillion just to get real private GDP per capita back to even with 2006-08, i.e. ,real private GDP per capita is no higher than in 2006-08.
Thus, given total debt to private GDP, US public debt (not counting local and state debt) exceeding 100% of private GDP, and total gov’t, health care, education, and debt service well over 50% equivalent of GDP, growth of debt is no longer contributing to growth of private economic activity per capita.
The world reached what might be referred to as the debt jubilee threshold in 2007-08 and faces a Japan-like secular stagnation indefinitely hereafter.
But the capitalist world has been here before: 1930s to early 1950s; 1890s; and 1830s-40s, i.e., the Schumpeterian depression of the debt-deflationary Long Wave Trough. During each of the previous epochs, there was a deflationary banking and financial wipeout that effectively cleared the decks for the system to restart from a lower level of debt (canals, railroads, industrial, banking, etc.).
However, today, this would not be permissible and thus debts are rolled over, restructured, bailed out, etc., as well as eventual monetization of public debt to fund deficits to prevent nominal GDP from contracting. But the deficit spending results in effectively no multiplier to private sector activity, as a larger share of receipts go to debt service, pensions and benefits, and subsistence income support, leaving little or nothing left for infrastructure.
The only way out of the Japan-like secular stagnation is debt forgiveness, default, restructuring, etc., which also requires the asset bubbles (equities over 100% of GDP vs. the 50% historical average and total debt of more than 3 times GDP) deflating, an acceleration of money velocity, and increasing labor share.
But accelerating automation of service sector employment, peak Boomer demographic drag effects, and regressive payroll taxes and medical insurance costs will place further pressure on labor share hereafter.
Precisely no one in positions of authority and influence is discussing the current situation within the context of the private and public secular debt constraints, and certainly not advocating debt forgiveness.
Therefore, confusion, misperception, misdirection, and obfuscation will continue to dominate the Establishment discussion, implying a Japan-like situation will continue with our eyes wide shut.
BC:
Interesting blog you have going on there.
Of course, this works the other way around. For example, food seems to be cheaper nowadays, but if you want to eat the way you could in the 1950s, you would have to pay a premium. Look at the prices of fish, heritage breed meats, heritage breed fruits and vegetables and so on. Just eating without HFCS means paying a premium. Margarine is cheap, but fermented butter is a luxury item. If utility just means calories, that’s one thing, but if food is to fulfill its anthropological purposes as well, then that’s another.
You could argue that cars had higher utility in the 1930s and 1950s as well. Traffic was lighter. I remember the early 1960s. We lived in Queens, but we could easily drive into Manhattan on weekends and find on street parking just about everywhere. By the 1980s, this was a challenging experience and parking was expensive. You could make a similar argument about driving around in the suburbs before the traffic system saturated. A 2010s car might be more fuel efficient, have more comforts and conveniences and be much less likely to kill you, but it is much less useful.
Housing also has two sides. If you consider part of the value of your home to include your ability to walk to do light shopping, walk to school, walk to the library and so on, modern homes are no where near as useful. Some time back, people would pay a premium for a place in the suburbs. Now they pay a premium for a place in the city.
I don’t think we’ve passed some idealized peak medical care quite yet. People do pay for medical concierge service to get old fashioned GP attention, but medical care is much better nowadays for most people. Still, I’d be very leery about asking questions about whether you would prefer item X from year Y versus year Z and using that to argue about inflation. In year Y you didn’t have a choice, though you could argue that certain costs in year Y were actually paying for the new, improved X in year Z. and require some kind of adjustment for that.
At a certain point this kind of argument starts to resemble the old KLH sound system ads asking how much one values one’s wife. An anthropological rather than economic approach might be more useful.