Saturday, May 4, 2013

The Trend of Things

Amid all our concern about financial crises, zero lower bounds, stimulus packages and the euro, its worth remembering that they are related to a short-term fluctuation (albeit a relatively large one) around a long-run trend, and it is the trend that ultimately determines how well-off people will be in the future.  Or,
The prevailing world depression, the enormous anomaly of unemployment in a world full of wants, the disastrous mistakes we have made, blind us to what is going on under the surface to the true interpretation of the trend of things. For I predict that both of the two opposed errors of pessimism which now make so much noise in the world will be proved wrong in our own time-the pessimism of the revolutionaries who think that things are so bad that nothing can save us but violent change, and the pessimism of the reactionaries who consider the balance of our economic and social life so precarious that we must risk no experiments. 
as J.M. Keynes wrote in "Economic Possibilities for Our Grandchildren" (1931).*

The rise in living standards over time - the long-run growth rate - depends on labor productivity (i.e., output per hour of work).  That, in turn, depends on capital per worker and technological progress (broadly defined as our ability to wring more output from a given amount of capital and labor).  Since capital has diminishing returns, it is really technological progress that ultimately matters.

At his Conversable Economist blog, Tim Taylor notes that growth in per capita real GDP over the past two centuries in the US has been remarkably consistent in the long run.  Using Measuring Worth's series, it looks like this:
[Note: plotting the logarithm means that the slope of the line is proportional to the percentage growth rate; the gridlines at 7.5, 9 and 10.5 correspond to $1800, $8100 and $36300, respectively]**

Technological progress essentially determines the slope, and a seemingly small rate of change, compounded over a few decades, is a big deal - a much bigger deal, measured in output, than the "great recession" (whether output is the right thing to count is another, more complicated, matter). So it may be cause for concern that productivity growth, after picking up in from the mid-1990's through the early 2000's, appears to have slowed again.

Average TFP growth rates, US Private Sector (source: BLS)
1948-73:      1.9%
1973-95:      0.4%
1995-2007:  1.4%
2007-11:      0.4%

The New Yorker's John Cassidy has some interesting musings on why that might be.  The alarming possibility is that the productivity resurgence associated with the internet is petering out already.  However, in the short-run, productivity measurements can be volatile and affected by business cycles, so its we may want to hold off on worrying that the trend has turned down.

*I'd actually started writing this and forgotten to finish it put it aside some time before Niall Ferguson's repellent remarks (that he quickly apologized for) about Keynes not caring about the future because he was childless; "Economic Possibilities" is not only evidence that Keynes cared about the long-run, but that he had considerable insight into the process of long-run growth which anticipated some of the implications of Robert Solow's work in the 1950's.  Though it should be admitted that  Keynes' essay also shows that he wasn't entirely above invoking offensive stereotypes himself.

**If anyone knows of a graphing program that easily does a nice job with log scales, I'd love to hear about it (the ones Excel makes don't come out very well and I'm repeatedly aggravated by trying).


The Arthurian said...

Hi, Bill. On productivity: Is there any clear relation between cost and productivity? For example, if costs go down then productivity goes up (and the reverse)?

The arguments I make about the economy would be supported by such a relation.

I realize that the "output per hour" calc is an attempt to remove costs from the relation by looking at time and product. Still...

Specifically, I am thinking of the overall cost of finance in the economy, which is in tradeoff with the benefit we get from credit use.

Bill C said...

So, if wages stay the same while productivity goes up, then what the BLS calls "unit labor costs" go down.

Standard economic theory says that, over time, wages should rise and fall with productivity. But as you know, standard economy theory isn't a perfect exact representation of the world. I think the real wage - labor productivity relationship a pretty good rough picture over the long run, though.