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The Bush miracle ?

August 15th, 2003

I got this graph of US productivity growth from Brad de Long Productivity_2003-08-09.gif , and it struck me that it’s only after 2000 that there is any real action here. As Brad says, in a normal postwar recession, we would have expected a decline in productivity growth (and maybe even negative growth) arising from labor hoarding – this was the name given to the propensity of employers to keep workers on through economic downturns. Since most employers now engage in large-scale layoffs even during booms, it’s not surprising that labor hoarding is no longer an issue.

Still, given the triumphalist rhetoric that came out of the US throughout the Clinton administration, the productivity growth for this period was remarkably unimpressive. One possible explanation for the contradiction is that the graph shows changes in output per hour worked whereas most attention in the 1990s was focused on output per worker, which was rising with increasing working hours.

In any case, if productivity growth had declined in 2001 as usual, there would have been no story in this picture. For those who attribute economic outcomes to political leadership, the obvious explanation is that Bush has produced an economic miracle.

I don’t believe in miracles, and I also think there’s a problem with Brad’s analysis in which rapid productivity and slack demand produce rising unemployment. US demand for manufactured goods (which is still the most important single part of nonfarm business product) has risen since 2000, but the increase has been met almost entirely by imports. Hence, US manufacturing output has been roughly constant and hours worked have fallen by about 15 per cent. If US productivity was really rising as fast as the graph suggests, there should have been a fair bit of import displacement, especially since the dollar began depreciating a year ago.

Perhaps there are long lags in the process of adjustment to a depreciation (Australian readers of a certain age will recall the endless wait for the “J-curve”).

But I prefer some combination of the explanations I put forward in my post on productivity. In particular, there’s the problem of factor composition. The present recession is unusual because it has been characterised by massive overinvestment. With output growth weak, capital productivity has fallen.

In these circumstances, the best way to assess the underlying productivity trend is to look at multifactor productivity. Unfortunately the data is only published annually and the most recent estimates, from the Bureau of Labor Statistics are for the change from 2000 to 2001. As would be expected from the discussion above they show a rise in labor productivity and a decline in capital productivity. The net impact was that

From 2000 to 2001, multifactor productivity fell 1.0 percent in both the
private business sector and the private nonfarm business sector

. This was the first fall since 1991. I’d expect some recovery in capital productivity to have taken place since then, since investment has been weak, but it seems unlikely that MFP growth for the period since 2000 has been more than marginally positive.

I think we’ll have to put the Bush miracle in the shed with all the others.

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  1. August 16th, 2003 at 13:42 | #1

    This graph is of critical importance, as actual-industrial indexes (of income and output) are of greater intellectual reliability than potential-financial ones.
    There are many things to mull over in this chart, and it would take a more acute tea-leave pattern ponderer than me to piece the puzzle together.
    Presumably this graph of commercial business productivity measures the total ie MF productivity of that sector? How can the authorities say that US MFP dragged it’s feet at only a 1% pa growth rate in 2000-1 when the graph shows productivity for this sector is hovering above 3% for most of the naughties?
    Some remarks in an attempt to resolve the paradox of US nineties financial triumphalism and industrial ho-humphalism:
    the rather average productivity rates of the late nineties be explained by poor capital productivity over that period ie overinvestment in dodgy dotcoms and telcoms and hiring of marginal (less-productive) labour
    the early nineties reduction in business investment (in both capital and labour) would, for a given level of output, explain the much higher total productivity rates in this recent phase of the cycle
    the striking thing about this productivity graph is that the secular trend in productivity growth has been steadily increasing for the whole of the business cycle ie no post-recessionary productivity crashes
    the US economic miracle of the latter half of the nineties was mainly demonstrated in financial, rather than industrial, indices – it was speculative rather than realised
    the most important financial index that asset indexes do not chart is the appreciation in the value of the $USD. This specie liquidity appreciation temporarily increased the US’s purchasing power by more than the rise in US industrial productivity (ie ~20-30% on TWI).
    the late nineties surge in financial indices saw a massive increase in the value of both US equities indices and US liabilities, as Americans sold equities, securities and realties in return for cash to spend on imports.
    Since the crash both the index value of equities and the $USD has declined. The US still has the same $USD-valued stock of liabilities but a lower $USD-valued stock of assets. This implies a reduction in US net wealth.
    the post-bubble variation in US financial indices has to a significant extent been portfolio re-composition rather than an aggregate depreciation. ie some of the fall in equity/security values has been compensated by a rise in property values
    Now the US equity (stock) market is bullish but the security (bond) market is bearish, given a positively sloping long term yield curve. They can’t both right

    In conclusion, there appears to be a contradiction inherent in both the US’s main industrial productivity and financial progressivity indices.

    Please explain.

  2. August 16th, 2003 at 13:59 | #2

    Pr Q

    I think that in addition to addressing the myriad points I made in the previous comment, and performing your academic, research and family duties, you should immediately blog on the US power black out.
    It appears that the US Energy Commission has immediately dropped into defensive spin mode blaming the blackout as a failure of investment, not deregulation:

    It’s very clear this is not about deregulation. It’s about investing in the transmission system,” said Nora Brownell, a member of the Federal Energy Regulatory Commission.

    Pres Bush claims that the power outages are a result of massive underinvestment, which would imply that de-regulated utlities have sub-optimal investment schedules.
    This contradiction between purportedly optimum free-market theory and reportedly sub-optimum fleeced-market practice would seem tailor made for one of PR Q’s drolly vindictive I-told-you-so’s.

  3. John
    August 16th, 2003 at 15:00 | #3

    Jack, the graph shows labour productivity – output per hour worked. Because there was extensive capital deepening, financed by international borrowing, MFP growth was much weaker, as was growth in national income per hour worked (since national income excludes income accruing to foreign-owned capital).

    As regards the I-told-you-so, you read my mind. See post above.

  4. August 16th, 2003 at 15:20 | #4

    Pr Q,

    Re: productivity
    That clears up my muddle over the different industrial productivity indices.
    Moreover, the industrial productivity indices, both LAB and MFP, measure G& S output, not income, per unit of time. This raises the issue, faced by Aust as well, of big US-liablities for interest/dividend/rent servicing costs on foreign owned factors, which must deducted from this output per tempo to arrive at a US-domiciled net income per tempo.
    These liability-servicing considerations reduce the utility-enhancing aspect of all this hard work.
    There is still the deeper mystery of bullishness in US financial equity/property indices and their inconsistency with bearish security indices. These bullish asset indices imply very high earning potentials for US industry, that are not warranted given Pr Q’s ho-humpahlism about US productivity and bond traders expectations of a rise in long term interest rates.
    I expect that the explanation for this may be framed along the lines of “well what do you expect from finance markets – an even break?”

  5. August 16th, 2003 at 15:21 | #5

    Pr Q,

    re: privatisation/deregulation

    I was eerily presicent of your eerie prescience.


  6. Dave Ricardo
    August 16th, 2003 at 18:09 | #6

    *Unfortunately the data is only published annually*

    Don’t you mean, the data are published only annually?

  7. Brad DeLong
    August 17th, 2003 at 01:53 | #7

    >>With output growth weak, capital productivity has fallen. In these circumstances, the best way to assess the underlying productivity trend is to look at multifactor productivity.

    Why? falling prices of IT have led to an *enormous* increase in the rate of capital deepening. Stagnant capital productivity and slow growth in multifactor productivity are not inconsistent with rapid growth in labor productivity if capital goods become really cheap really fast…

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