Slow Growth in Productivity: Can Anything Be Done?

J. Bradford DeLong :: U.C. Berkeley, NBER, and WCEG :: 2016-09-09 :: http://tinyurl.com/dl20160909a

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Slow Growth in Productivity: Can Anything Be Done?

J. Bradford DeLong :: U.C. Berkeley, NBER, and WCEG :: 2016-09-09 :: http://tinyurl.com/dl20160909a

What Are We Talking About Here?:

  • Perceived poor performance of the American economy.
  • Measurement issues are fascinating and important, but largely orthogonal to perceived poor performance.
  • Slow growth in overall productivity only one and not the most important aspect of perceived poor performance:
    • Inequality.
    • Declining mobility.
    • Millennials. *And these problems have, of course, been offset by the enormous decline in what can only be called caste privilege.

2016 09 09 Productivity Musings 2

Three “Productivity Slowdowns”:

  • The first trend breaks comes around 1973: the drop from $125K to $80K to of notional 2025 GDP per capita at 2009 prices.
  • The second up-and-down comes with an up in 1995 and a down around 2004: the drop from $80K to $75K expected come 2025.
  • The third comes since 2008: the drop from $75K to $63K expected come 2025.

The Third Is Robert Barro’s “Non-Covery”:

  • We should have had substantial bounce-back to trend after September 2009. We didn’t.
  • It’s not because the economy is incapable of reallocating resources.
  • It reallocated resources fine away from housing and into exports and investment over 2004-2008

2016 09 09 Productivity Musings 2

See? Over 2006-2008 We Reallocated Resources Out of Housing on a Huge Scale:

  • As financial markets changed their minds about risk and return in housing…
  • We moved huge amounts of resources out of the housing-construction sector…
  • And, smoothly, into business investment and exports.

2016 09 09 Productivity Musings 2

The Diagnoses of the Problem We Heard Here Yesterday…:

  • Seemed to me to focus around problems of “reallocation” and “dynamism”…
  • Seemed to me flawed in a relative neglect of the difference between a high-pressure and a low-pressure economic environment…

Whether “Reallocation” Is into Unemployment or a Booming Sector Is Really Important:

  • Keynes (1936): “I defend [my policies] … as the condition of the successful functioning of individual initiative.... If effective demand is deficient... the individual enterpriser who seeks to bring... resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros.... The increment of the world’s wealth… [reduced] by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough…"
  • Davis and von Wächter (2011):
    • U-3 < 6%, mass-layoff workers lose 1.5 years' worth of pre-displacement earnings.
    • U-3 > 8%, mass-layoff workers lose 3 years' worth of pre-displacement earnings
  • Chodorow-Reich and Wieland (2016):
    • An area with reallocation +1SD -> employment 2% lower at the end of a national recession-recovery cycle.
    • Reallocation has no effect if it occurs during an expansion.

The "Reallocation" Problem Comes After 2008:

  • The financial-crisis freeze-up of the economy…
  • As housing, exports, investment collapse…
  • And the Recovery Act is undersized by, arithmetically, a factor of 6

2016 09 09 Productivity Musings 2

And Then We Hit the Economy on the Head with the Austerity Brick, Over and Over Again:

  • We also fail to restructure housing finance to encourage construction to help all those people move out of their sisters’ basements.
  • And, with interest rates at zero, the Fed finds no way to signal exports and business investment to take up even more of the slack than they do.

FRED Graph FRED St Louis Fed

Can We Still Recover from the Post-2008 Disaster?:

  • We now need to start calling it: “The Longer Depression”…
  • Back in 2009 I said that we obviously will recover, easily.
  • Back in 2012 I said that we could recover—DeLong and Summers—straightforwardly.
  • Now?
  • Gerry Friedman still thinks we could do so.
    • I’m more pessimistic: but I’m not going to argue anything with Gerry until November 15
  • Nevertheless: worth trying.
    • We should, right now, be desperately trying to generate a higher-pressure economy if only just to see how much low-hanging fruit can be picked via easy aggregate demand-boosting measures
    • Greenspan did it in 1995, and we all were very pleased that he did so.

Aside from Strive for a High-Pressure Economy and Hope, What Can We Do?:

  • Where is there low-hanging fruit?
  • What are our value-subtracting industries?
    • Finance (we pay 8% of GDP for net services that used to cost 3%)
    • Health care administration (we pay 5% of GDP for services other countries pay 1% for)
    • Mass incarceration (another 2% other countries do not pay)
    • NIMBYism
      • Residential (but how mportant is it outside of SF, BOS, DC?)
      • Occupational (perhaps?

More Low-Hanging Fruit:

  • Truman started the process of turning the federal government into an entity with a permanently very large military (for good and sufficient reasons, but still).
  • Johnson set in stone the process of turning the federal government into an insurance company too.
  • “An insurance company with a military”—that’s where we are.
  • Is that where we should be?

All Growth Comes from “Investment” of Some Kind:

  • All growth comes from somewhere: it doesn’t just precipitate out of the air.
  • Net private investment roughly 7% of net domestic product.
  • Other net investment-like activities of equal magnitude—figure 15% of net product devoted to growth, 10% to per capita growth
  • The average net rate of return on those expenditures is 20%/year.
  • There are some investment and investment-like expenditures that offer very high returns indeed.

Net private domestic investment Net fixed investment FRED St Louis Fed

The U.S. Government Could Do Much More:

  • In a world that is increasingly non-Smithian, confining government to military, insurance, property rights, and contract enforcement is just silly—even adding in standard infrastructure.
  • Incentivize the private creation of public and information goods:
    • Why is the government so good at committing itself to pay money in the event of failure—loan guarantees—but not success?
    • Prizes—cf., Michael Kremer.
    • Platforms: Why is it Google doing Google Books?
    • Platforms: Isn’t relying on advertising to fund write-once run-everywhere value-in-scale profoundly silly?

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