Monday, March 13, 2017

Josh Bivens — A ‘high-pressure economy’ can help boost productivity and provide even more ‘room to run’ for the recovery

A “high-pressure economy” that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth. This faster productivity growth would in turn blunt much of the potentially inflationary pressure stemming from tighter labor markets that generated faster wage-growth....
Productivity is defined as the average income or output generated in an hour of work in the economy. This makes it the ceiling to how much average living standards can rise over the long run in an economy. It is important to note that inflation-adjusted (or real) wages and incomes for the large majority of American workers and families have risen significantly slower than economy-wide productivity growth in recent decades. This divergence between a typical worker’s pay and economy-wide productivity is the root cause of the rise in income and wage inequality over that period.
The unequal distribution of the benefits of productivity growth is an extremely important issue. But even apart from the distribution issue, the rate of productivity growth remains a crucially important macroeconomic variable to track, not least because it provides an upper bound on how fast wages (both nominal and real) can rise....
Further, one does not have to search that hard for reasons why the last 5 years might be particularly uninformative for projecting future productivity growth. The fingerprints of demand-side slack holding back productivity growth are all over the data, so, as this slack relents, there is every reason to think that longer-term trends will reassert themselves....
Labor quality upgrading measures the contribution of a smarter, more experienced, and more educated labor force to productivity growth over time. Capital deepening measures the contribution of investments in plant and equipment that give workers better tools to perform their jobs. Total factor productivity growth measures how much output rises holding all other inputs (labor and capital) constant. Its long-run change is frequently interpreted as a sign of technological advance.…
Bears out MMT and Post Keynesian analysis that "it's the demand, stupid." Austerity was the wrong fiscal policy, and monetary policy based on ZIRP and QE was not able to counteract it, and may have contributed to it by reducing interest income.

EPI
A ‘high-pressure economy’ can help boost productivity and provide even more ‘room to run’ for the recovery
Josh Bivens | Director of Research at the Economic Policy Institute

15 comments:

Matthew Franko said...

Article in the Bezos Post over the weekend saying the same thing...

Maybe planted by the Fed?

Would provide some political cover if they dont raise this week....

Noah Way said...

"Demand side slack" is the result of unequal distribution and a world awash in everything.

"Productivity growth" is an utterly inane concept, akin to giving everyone cancer. Eternal growth is unsustainable.

lastgreek said...

Tom, I lost track of the other thread where you brought up Podesta's brother being a "hired gun for sale." So, if you don't mind I'll post it here:

Sberbank confirms hiring Podesta Group for lobbying its interests

MOSCOW, March 9. /TASS/. Sberbank confirmed the fact of hiring the consultancy of Tony Podesta, the elder brother of John Podesta, who chaired Hillary Clinton's presidential campaign, for lobbying its interests in the United States, press service of the Russian credit institution told TASS on Thursday.

http://tass.com/economy/934699

lastgreek said...
This comment has been removed by the author.
lastgreek said...

Darn. Had I waited a few more minutes, I could have put the post above in its proper place:

"Paul Robinson -- The Russians are coming!"

Ralph Musgrave said...

Half the economists in the developed world are worried about the slow down in productivity growth in their own country, while ignoring the fact that it has slowed down in almost all developed countries (e.g. Simon Wren-Lewis (first link below). But what’s really odd is the slow down in low income economies: there is no obvious reason why they should have slowed down the pace at which they adopt more advanced countries’ technology (see 2nd link).

https://mainlymacro.blogspot.co.uk/2017/03/the-output-gap-and-innovations-gap.html

https://twitter.com/DuncanWeldon/status/841331513736196096

Andrew said...

"Demand side slack" is the result of unequal distribution and a world awash in everything.

Generally, yes. What stuff (other than beachside property) do people really want that they don't have? And even if there are deficits, how long would it take to supply? Not long, I guess.

Economics is broken.

Matthew Franko said...

The underlying condition is surplus in real terms...

So you have to think about "supply and demand!" under the condition of real surplus...

franco said...

Ralph,

Not that I've looked at it in any depth but if we can attribute low productivity growth to deficient demand (at least partially, the downward trend looks like it starts in the early 00s), then why can't the same apply internationally?

I'm probably wrong but if global trade has been significantly lower then it seems unlikely for lower income nations (in general) to continue investing in better tech seeing as there less likely to see returns. Plus they can't rely on domestic demand to substitute for the fall in foreign trade given their low income and mainstream economic advice is probably not helping them to rely more on domestic demand.

Tom Hickey said...

The global problem is oversupply and lack of demand. Simple to fix, other than for morons.

Andrew said...

The global problem is oversupply and lack of demand. Simple to fix, other than for morons.

Well, that depends on what you want as outcome. If people had more $, what would they do with those $? If they'd just bid up assets controlled by rentiers...

Everyone already has an iPhone and air conditioning, as the welfare nags are happy to tell you.

Tom Hickey said...

Well, that depends on what you want as outcome

The objective is growth without goods inflation or wage increases. Asset appreciation is an outcome of growth in their view.

Growth requires corresponding growth in the money supply. They don't want governments contributing because "crowding out."

So growth has to be funded by increases in private debt, which eventually results in financial instability.

The world is still recovering from the GFC, and deleveraging is not yet over, so credit extension is lagging since stagnant incomes result in lagging demand for goods that results in dampened investment.

So the problems affecting demand to spur growth are fiscal austerity on one hand and private sector debt aversion on the other.

Andrew said...

@Tom,

That seems pretty vague. In real terms what do you see as success? What do you see people consuming that they aren't consuming now? Are you talking about US, advanced economies or something else? If you gave everyone in the US a $10,000 raise, for instance, what do you think they'd spend it on? Or would they mostly pay off debt?

Tom Hickey said...

In real terms what do you see as success?

• economic growth consistent with population growth

• increased productivity to support a higher standard of living

• ecological sustainability

• distributed prosperity

• actual full employment

• price stability

intajake said...

glen brucewald says that productivity slow downs can partially be attributed to
over regulation on firms.... he specifically attacks the idea its a demand shortage issue

https://www.youtube.com/watch?v=zMOXblmweBk

another issue is the predominance of the service sector in the economy makes it harder to measure productivity improvements.

some of the comments here are shocking
"
"Productivity growth" is an utterly inane concept, akin to giving everyone cancer. Eternal growth is unsustainable."-wtf are you talking about

in fact productivity growth allows the population to enjoy high gdp per capita even with gdp staying stable.



"What do you see people consuming that they aren't consuming now?"-who are you and where do you live........that comment could only be made by some 1 in a bubble.how about affordable healthcare, housing and education.


http://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

by and large the majority of people re barely keeping their heads above water,livng month to month.