Recovery and Productivity
From the office next door, Barry Eichengreen writes:
A Productivity Boom-in-Waiting?: BERKELEY – A double-dip recession is one thing, but a lost decade is something far more sinister. In the United States, there is growing concern that the worst recession since the Great Depression has damaged the economy’s capacity to grow.... Having been burned by the crisis, banks have tightened their lending standards.... A more limited supply of bank credit will mean higher capital costs.... Governments, for their part, will come out of the crisis more heavily indebted, which implies higher future taxes, less investment, and hence slower rates of growth.... [A] hard core of long-term unemployed whose skills atrophy and who become stigmatized in the eyes of potential employers. Rising structural unemployment will reduce labor input and efficiency....
All of these effects were evident in the wake of the Great Depression.... Stocks of both equipment and structures were actually lower in 1941 than in 1929.... Skills were lost, and the hard core of unemployed were stigmatized and demoralized.... George Orwell graphically described it in The Road to Wigan Pier. The result was a disappointing, all-but-jobless recovery. In the US, unemployment was still 14% in 1937, four full years into the recovery....
But there was another side to this coin. Output expanded robustly after 1933. Between 1933 and 1937, the US economy grew by 8% a year. Between 1938 and 1941, growth averaged more than 10%. Rapid output growth without equally rapid capital-stock or employment growth must have reflected rapid productivity growth. This is the paradox of the 1930’s. Despite being a period of chronic high unemployment, corporate bankruptcies, and continuing financial difficulties, the 1930’s recorded the fastest productivity growth of any decade in US history.
How could this be? As the economic historian Alexander Field has shown, many firms took the “down time” created by weak demand for their products to reorganize their operations. Factories that had previously used a single centralized power source installed more flexible small electric motors on the shop floor. Railways reorganized.... There are hints of firms responding similarly now.... So, even if there are good reasons to expect a period of sub-par investment and employment growth, this need not translate into slow productivity or GDP growth.
But this positive productivity response is not guaranteed. Policymakers must encourage it. Small, innovative firms need enhanced access to credit. Firms need stronger tax incentives for R&D. Productivity growth can be boosted by public investment in infrastructure, as illustrated by the 1930’s examples of the Hoover Dam and the Tennessee Valley Authority.... [E]ven if rapid productivity growth is possible under current circumstances, it cannot be taken for granted. Policymakers need to act...
