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Is factor productivity due to revert to its long-run mean?
Peter Ireland and Scott Schuh write:
A two-sector real business cycle model, estimated with postwar U.S. data, identifies shocks to the levels and growth rates of total factor productivity in distinct consumption- and investment-goods-producing technologies. This model attributes most of the productivity slowdown of the 1970s to the consumption-goods sector; it suggests that a slowdown in the investment-goods sector occurred later and was much less persistent. Against this broader backdrop, the model interprets the more recent episode of robust investment and investment-specific technological change during the 1990s largely as a catch-up in levels that is unlikely to persist or be repeated anytime soon.
Here is the paper, have you noticed that NBER working papers seem to have been freed from the gate?
On questions like this I prefer to be "judgment-driven" rather than model-driven, and judgment says "who knows?" Plus two-sector calibrated RBC models are not in every regard a smashing success. Yet why should the rate of productivity growth remain permanently higher? At the very least, this is an admonition to be sober and modest in our economic judgments. The rate of productivity growth is a fundamental determinant of long-run living standards. Yet when it comes to understanding or predicting this variable, economics has been sadly deficient, especially at the turning points. Commentators of various political persuasions rail against taxes, tax cuts, spending, spending cuts, poorly thought deregulation, whatever, but might they be chomping at gnats?
Posted by Tyler Cowen on December 3, 2007 at 01:26 PM in Economics | Permalink
Comments
Alan Greenspan recently has been making statements expressing similar skepticism that productivity growth can continue as it has. Far be it for me to disagree with all these lofty experts, but as someone well versed in using IT to improve productivity, the entire world of business still looks like a frontier of completely inefficient business processes to be improved.
Posted by: Jonas Cord Jr. at Dec 3, 2007 2:28:10 PM
Tell me what permanently increased productivity with the industrial revolution and we will both know. Simply substitution of machine power for animal power, growth of scientific and engineering knowledge, increased division of labor, change in world view, or many other possible things? What would it take to accomplish something similar again, a singularity?
Posted by: Lord at Dec 3, 2007 2:52:14 PM
I'm with Jonas. There is an incredible backlog of productivity enhancing technology that is in the pipeline waiting to be implemented. We're just getting started on productivity improvements.
Just consider that, in most of our lifetimes, every person on the planet will likely have access to the instantaneous and robust information capabilities of an Internet that is vastly more powerful than today. How can that not be a massively more productive world than the one we live in?
Posted by: Tom Kelly at Dec 3, 2007 2:55:02 PM
Are these business cycle models used by investors to shape their investment strategies and predict slowdowns? If not, what good are they? No offense to anyone here, but I'd rather look at markets to judge these things (instead of blogs), where people must put their money where their mouth is.
I think the Internet will lead to more productivity than most people imagine today. If Internet-based markets are allowed to prosper, I think they will create vastly more coordination in the global economy over all sorts of goods and services by way of price signals. I don't know what form it will finally take, but I think the scope will be tremendous. After all, the Internet was never really about connecting computers, it was about connecting people.
Posted by: G at Dec 3, 2007 3:16:12 PM
I think the authors are shooting blanks on that one.
But these lines are a good example of Thinking on the margin.
"Yet when it comes to understanding or predicting this variable, economics has been sadly deficient, especially at the turning points. Commentators of various political persuasions rail against taxes, tax cuts, spending, spending cuts, poorly thought deregulation, whatever, but might they be chomping at gnats?"
The sad reason for this happening in 1973.
http://www.umsl.edu/services/govdocs/erp/1997/chart1-3.gif
Is the same reason that 1973 was a terrible year for this too.
http://news.bbc.co.uk/2/hi/special_report/1999/11/99/battle_for_free_trade/525225.stm
But then again, what was it that happened in 1973.?
Posted by: Russ at Dec 3, 2007 4:32:59 PM
The models assume that manufacturing and service have the same productivity. A large influx of spending in the service economy would average out to a lower productivity, even if manufacturing remained stable or was improving. (Assuming that service has zero productivity because there is no object involved in the transaction.)
It is no coincidence that the 70's was the period that had lowering of the defense spending relative to GDP. See http://delong.typepad.com/sdj/2007/12/the-recent-past.html#comments for graph. (I had some trouble getting them to load up.)
During that period developments in defense spending in the 50's and 60's were starting to be applied at the manufacturing level.
There haven't been many developments since computers from defense R+D. So we have nothing to apply now, except some minor things like GPS, probably from Star Wars.
Posted by: wood turtle at Dec 3, 2007 6:36:28 PM
Hm, the NBER gate still seems to be up...maybe it was only down by mistake?
The NBER gate has always struck me as very odd --- why keep research papers out of public view? And it's not like most economist don't post their working papers online either, with a few exceptions.
BTW, does anybody have an explanation for why different academic disciplines have very different online posting conventions? Sociologists of all people almost never post their papers online, political scientists are somewhere in the middle, and economists almost always do. Why is this? It almost looks like a left-right ideological spectrum, with left wing academics more deferential to corporate publishing IP rights. Or is it a disciplinary income gradient? And why would any of this matter for posting one's papers online?
Posted by: stefan at Dec 3, 2007 9:28:04 PM
I tend to agree with the "there is much left to do" crowd. I can't imagine life before Google and the internet, I can't even remember how I lived before.
Plus, despite all of the recent problems with financial innovation, we are innovating. The derivatives we created in the last decade are not bad, they just had the wild west structures that tend to bite back. The idea of creating pools of debt and then separating the tranches is a good one, if the models underneath them are good. We just had a bunch of PHDs create them, and they until 4 months ago thought the recent past tells the long term future and you can summarize all risks in numbers.
Finally, we are going to be moving to an energy regime over the next 50 years that is renewable and technology driven. We are looking at ever cheaper energy for the third time in our history - the first was from 1940 to 1970, second from 1985 to 1997. It will be about the same effect as going off the gold standard had on international economies. And for the first time, it will be brain power driven, not extraction driven. Starting in about 10-12 years we are going to get cheaper and cheaper energy. The 10 years between will be tough and may even be similar to the great depression.
Factor productivity isn't going to be great for the next decade, but after that watch out! The world will have trained several million more scientists and engineers by then.
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