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Was recent productivity growth an illusion?
Here are some slides from Michael Mandel, he says yes it was an illusion. Matt Yglesias has a good summary of his argument. Median wages were stagnant, the stock market was down, and health care costs were rising, without necessarily translating into better outcomes. Mandel argues that the current collapse in part stems from the revelation that productivity growth (and no, he doesn't trust the reported numbers) was low all those years. On top of all that perhaps productivity growth in finance was overstated as well.
My take is this: there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don't prop until the revenue-generating sectors of the economy as one might have expected. Given that, the rest of Mandel's argument can still work, whether or not you think the productivity gains were a mirage in some absolute sense.
Posted by Tyler Cowen on March 3, 2009 at 05:59 AM in Economics | Permalink
Comments
So there's been this puzzle: if there's so much more productivity, how come the price of labor hasn't been bid up?
Now we know the answer: the productivity gains were modest and they were eaten by healthcare.
(Notice that this undermines the standard left-wing story of the greedy capitalists won't share and vindicates the standard right-wing story of our official statistics are shit
Posted by: run at Mar 3, 2009 8:28:06 AM
The problem with current productivity evaluations is that the value of digitized IP isn't properly figured into the mix. In reality, the actual production/value of anything which can be digitized and distributed is woefully understated in the modern economy. Everyone keeps equating DIP to "real property", when it's very much not. It's "property", but by analogy, it's property in the same sense that ice is steam. Yes, they are both water but there is a phase change worth of difference in how they behave in many areas.
I've yet to see anyone who officially calls themselves an "economist" produce anything demonstrating as clear an understanding of this as John Perry Barlow (not an economist) did in
The Economy of Ideas
fifteen years ago. It's pretty obvious HE got it, what the heck is the problem with the rest of you?
Posted by: Obloodyhell at Mar 3, 2009 8:57:36 AM
> and they were eaten by healthcare.
And gov't bureaucratic paperwork. Never forget that eternal gift of government.
Posted by: Obloodyhell at Mar 3, 2009 8:58:34 AM
Cowen's analysis just seems like the part of economic productivity that he can observe. If there were comparable advances in oil extraction, agricultural yields, or microchip production you wouldn't be likely to know.
Posted by: OneEyedMan at Mar 3, 2009 9:14:44 AM
"...perhaps productivity growth in finance was overstated as well".
You think?
Considering that at the height of the business cycle 40% of measured corporate profits came from the financial industry, much of which in retrospect was clearly fictitious, that our banking system as a whole is now widely considered to be insolvent, it is evident that a large part of the financial system was a vast value-destroying enterprise.
Posted by: Phil P at Mar 3, 2009 9:24:07 AM
Capital consumption?
Posted by: josh at Mar 3, 2009 9:59:34 AM
So, uh, what if we really are reaching the end of the century-ish-long period of apparently ceaseless productivity growth through technology and rationalization? What will that mean?
Posted by: Christopher M at Mar 3, 2009 10:53:29 AM
Maybe. But there was a great deal of observable technological change and innovation in the last decade. The gains probably did go mostly to consumer surplus. Open entry, competition and trade keep changes in rents close to zero, so wages and the S&P gains would be minimal.
The really sad part of Michael’s analysis is the prognosis for the future. Michael says that "innovation" is the way to future growth and prosperity (who would argue with that?), but our new President plans tax policies that reduce incentives for innovation. The new ‘War on the Wealthy’ promises higher taxes for investment, for income, for health care, and for non-profits. Physicians are to be "squeezed" to cut costs and pharma can expect price controls.
The War on the Wealthy will result in less innovation during the next decade. Good bye to Michael's rosy future. Hello increased poverty, stagnation, and conflict.
Best,
Adam
Posted by: Adam at Mar 3, 2009 11:54:48 AM
"there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus." So this "productivity" was, um, what, increased generation of pixie-dust? Polishing of rainbows and grooming of unicorns? Just general overall good-feeling-ness for everybody?
If we're resorting to terms like "gains to consumer surplus," sounds like we need a new definition of "productivity" -- or perhaps "reality."
Posted by: Allen Varney at Mar 3, 2009 11:57:08 AM
There is also the possibility that some of the productivity gains may
well reduce future output and surplus. So, the spread of downloading
music through the internet may lead to less production of music, and
the blogosphere may well lead to the collapse of daily newspapers,
although the blogosphere relies relentlessly on the newspapers to
provide the major in-depth reporting that goes on.
Posted by: Barkley Rosser at Mar 3, 2009 12:23:08 PM
It's common knowledge that real incomes are difficult to estimate because they rely on a basket that doesn't change over time, but the kinds of things people want and the quality changes constantly. I wonder if, as the economy grows and technology improves, the types of goods automatically diversify, making it increasingly hard to run those estimates. So I don't trust any of them.
It seems that the housing bubble + land use restrictions caused a lot of price increase for most people, and I don't see how to factor things like that in a simple way. But clearly it was very damaging to the real income of young workers, perhaps even enough to nullify technological advancements. It's also commonly said that US medical expenditures are about 50% waste. That's not for certain but it could be another big problem.
But if so, that makes policymakers jobs "easy": crush the housing bubble and create a subsidized research board that evaluates the cost and benefit of all medical procedures and publishes them for the benefit of consumers and payers. I think Obama even actually supports the second one. Land use restrictions will be hard to kill, though, I think. They feed quite naturally into people's worst instincts and strongly held traditional beliefs.
Posted by: Dave at Mar 3, 2009 12:52:11 PM
And gov't bureaucratic paperwork. Never forget that eternal gift of government.
That's what I love about private insurance companies operating in the free market. There's no bureaucracy, no paperwork, no administrative costs. It's a real testament to the power and strength of ideology and words -- these things just disappear from plain sight.
Posted by: Barbar at Mar 3, 2009 2:11:12 PM
The new ‘War on the Wealthy’ promises higher taxes for investment, for income, for health care, and for non-profits
Even Reagan raised taxes, did he conduct a "War on the Wealthy" as well? This is standard Republican fare, wer taxes on the rich. Watch massive deficits grow. If anybody suggests raising taxes, declare that raising taxes back to previous level would destroy the economy. Willfully ignore that the economy performed just fine at those tax levels before.
Posted by: Byrk at Mar 3, 2009 2:30:18 PM
the standard right-wing story of our official statistics are shit
If in your meaning of right-wing you exclude every republican and/or conservative in government, this might make sense.
Posted by: washerdreyer at Mar 3, 2009 3:44:48 PM
The War on the Wealthy will result in less innovation during the next decade. Good bye to Michael's rosy future. Hello increased poverty, stagnation, and conflict.
Adam, I think you've nailed it. The political class (has anybody noticed how money politicians FROM BOTH PARTIES) will prosper, no matter what. Its sort of like Hillary Clinton's famous cattle futures trades-they seem to be long and short on everything and able to benefit as long as they can introduce some disruption into the system.
Posted by: Superheater at Mar 3, 2009 5:01:22 PM
"This is standard Republican fare, wer taxes on the rich."
What does this mean?
Posted by: Adam_Baum at Mar 3, 2009 5:03:24 PM
"And gov't bureaucratic paperwork. Never forget that eternal gift of government.
That's what I love about private insurance companies operating in the free market. There's no bureaucracy, no paperwork, no administrative costs. It's a real testament to the power and strength of ideology and words -- these things just disappear from plain sight."
Let me give you an example of government "paperwork" as it applies to medicine. Specifically, this is drawn from my experience as an MA/MC auditor in "a large eastern state" with significant but concentrated MA eligible populations.
Several years ago, this state decided to push its MA eligibles to (now read closely, here comes Orwell) MANDATORY managed care. The program was (is?)labeled as blank_CHOICES. (In government, being assigned something is a choice).
The preferred reimbursement mechanism was to be capitation or payment of a fixed fee per person per month eligible to the provider organization -usually an MCO or managed care organization, the name "HMO's" like to called (remember HMO's? a creation of the left, specifically Ted Kennedy) after "HMO" became synonymous with paperwork, restriction, delay, denial and annoyance.
Of course, some "eligibles" automatically present higher exposure to the contracting provider, such as those with chronic diseases (HIV/AIDS or Hemophilia, for example). In addition the other big issue in the MA population is maternity care. Yes, its true-MA eligibles DO have 'em earlier and oftener, if my claim samples were anywhere near random. Lots of 15 year old "mothers" and 40 year olds aborting that had 6 kids. My favorite clinical note: "the client indicated she would become pregnant again by next year, as she is sure that she can handle high school and a baby at the same time". It was always fun to read the atttending social worker notes, so blase', so nonjudgmental...
My particular area of concern was the latter, maternity care. After reviewing countless pages of documents, including contracts, federal laws and regs, and a 150 page "request for proposal", we determined that payment was to be made to the provider for any live or non-live outcome, as long as the non-live outcome was a pregnancy beyond the first trimester and its termination wasn't due to induced abortion.
The governmental theory to paying for non-live outcomes is that if they can "encourage" all of these young women to get proper prenatal care-we can avoid a myriad of post-natal expenses, ranging from addiction syndromes to behavioral issues correlated with poor prenatal nutrition.
The problem was in all that documentation, NOBODY EVER DEFINED first trimester. The reason is simple. When you have a spontaneous abortion (miscarriage) the physician isn't collecting fetal tissue in hopes of weighing it, measuring it or estimating the age of the fetus.
And in spite of all the inducements to get the MA eligibles to be aware of their fertility, obtain FREE, FREE prenatal care and usually other enhancements to public assistance-most don't. So instead of having a nice record of OB./GYN visits with a "dead rabbit" to establish a record that would have a positive pregnancy test or physician estiimated date of conception, you have nothing.
Result? 68% of the billable non-live outcomes were rejected due to inadequate supporting documentation.
This is such an improvement from the days when a DAD wrote a CHECK to the doctor, no welfare bureacrats, insurers, actuaries or auditors necessary.
Posted by: Former MA Auditor at Mar 3, 2009 5:52:52 PM
Yes. You can tell by fuel consumption and transit activity being down. More importantly, efficiency fell after gas prices started rising a few years ago. So we had flat activity and decreased efficiency in transit since about the end of 2005, which is a damn good proxy for real economic activity.
The good new is efficiency is kinda-sorta improving.
Posted by: aaron at Mar 3, 2009 6:23:29 PM
Yes, we're in the midst of the anarchic rise of the internet, we're within a decade of mapping the human genome, we have biotech & nano tech, plant & animal husbandry are quaint relics. But I have some graphs that are flat, and some numbers that are stable, so clearly we are in a no-growth funk?!
Really, now. Does a single one of us spend even a day living in a way that would have been remotely possible 30 years ago? For example, this very discussion, between people from around the globe, moderated by a highly regarded economist, while sitting in our respective living rooms?!
We are in the midst of a revolution. This is like being alive when the printing press was invented & saying, "Big deal. Harvests were a little low in the southlands this year. Fat lot of good all those books are doing to help the harvest this year."
It's the numbers & graphs that need fixing.
Posted by: kebko at Mar 3, 2009 7:43:57 PM
Perhaps you should look at total compensation rather than wage. The former has increased at a healthy clip.
I also suspect that Dave (above) is right in thinking that there are qualitative factors at work that adjust the real wage in a positive direction. A look at history, even only a hundred years or so, shows that this effect is quite apparent. Cataloging a selection of improved products and services would probably yield a meaningful answer to the extent this may or may not have happened recently.
Posted by: Valens at Mar 3, 2009 10:34:42 PM
I am amazed at recent productivity growth. My Blackberry helps me to manage my professional life from practically anywhere. My Ipod carries thousands of songs--an impossible feat 10 years ago. I haven't bought a road map at a gas station in years because of my GPS. My new furnance definately helps to lower my heating costs. My wife raves about her new washer and dryer. I have an elliptical machine in my basement, so now I don't have to go to the gym as often to stay in shape. My kids text me on where to meet me at the mall.
How did we live without all this? I can't imagine going back.
Posted by: Elvin at Mar 4, 2009 12:27:31 AM
Presumably, it has always been true that some portion of productivity growth has increased consumer surplus rather than measured GDP / output per worker. So measured productivity growth is always an understatement of real productivity growth.
Do we have a story as to why we think that portion is larger over the last few years than previously?
How would we test that story empirically?
Posted by: Mike D at Mar 4, 2009 1:30:42 AM
I'm pretty excited about the internet and related technologies. I think we've really reached a new era in economic history, and I fully expect the stock market to go through the roof and head for the moon -- my prediction is that the Dow hits 36,000 within a few years. Some people think that that's totally unrealistic, but they don't appreciate how much technology will change the paradigm. It's a new world.
(Sorry, in a funny mood tonight.)
Posted by: Barbar at Mar 4, 2009 2:16:49 AM
The comparison with the 30s is perhaps more relevant than it seems. The internet buildout largely complete, the application work has transferred data input from special software to webapps which cut out the data entry clerks, and replaced filling in forms on paper with filing in web forms, something that is probably more of a burden. Back in the 30s, a new wave of mechanization (tractors) was eliminating a lot of farm workers who lived on the farm eating farm grown food and pushed them into places they probably couldn't grow as much, and had troubling finding work.
In neither case did the reduced labor required produce either more demand or more production.
I think if you think about it, most innovation is spurred by government spurring demand. The GPS resulted from government demand for a product no one made, and the private sector couldn't afford. The microchip resulted from government demanding lighter electronics for space launch because the US didn't get the German guys who did the heavy lifter (rockets). Computers were the result of government demand for artillary tables during the war, then for cryptography. The internet was from military demand for a reliable telecom system that would survive nuclear war. Data processing by Hollerith (later IBM cards) was meeting government demand for the census. Knowing the new furnance is more efficient goes back to Nixon/Carter and those energy crisis days.
In the past decade, the energy sector got a boost - the government solution of government provided land for drilling, and the war which was really about oil if there was no oil in the Persian Gulf, (the US would be as involved there as we are in Somalia, Darfur), which is hardly innovative. If the government put an equivalent value of resources into wind and solar and created some of the same government subsidies, energy would have started a ramp up much sooner and would be much stronger today.
And as for the taxes on carbon, etc., well, as an old liberal, I'm happy with conservative fiscal policy - we can just borrow to subsidize solar and leave the debt to some future generation. Surely conservatives will support borrowing to fund current spending with the taxing to be imposed in 25 years for a year or two to repay a bit, like in 2000-1.
Posted by: mulp at Mar 4, 2009 2:17:30 AM
"In the meantime you will read blogs and gaze upon beautiful people using your Facebook account."
Tyler,
Don't you mean that in the meantime you'll be masturbating furiously to pictures of your step daughter's friends on Facebook?
Posted by: Sullivan & Cromwell at Mar 4, 2009 12:01:57 PM
