Wednesday, May 4, 2016

Productivity is still the missing ingredient

This is a re-posting, with updated data and commentary, of a similar post three months ago.

We've know for years that this recovery is the weakest post-war recovery on record, and the chart above makes the case. If this had been a typical recovery, national income (GDP) would be about $2.8 trillion higher than it is today. That's like saying that average wages and salaries would be 17% higher. For a family earning $60,000, that's over $10,000 more income per year that has failed to materialize despite all their hard efforts.

What's been lacking is productivity (the additional output that each unit of labor produces), because productivity is the key to rising prosperity. We can only earn more if we work and/or produce more. We've had about the same rate of jobs growth (~2%) during this recovery as we had in the latter portion of the 2001-2007 recovery, but GDP growth has been much weaker. The reason? Very low productivity growth, as seen in the chart above. I use a 2-yr rolling annualized growth rate to measure productivity, since it is quite volatile on a quarter-to-quarter basis. Over a 2-year period I think the quarterly volatility tends to wash out and a truer picture is revealed. Note that the productivity readings we've had in the past several years have always been associated in the past with recessions. It's no wonder that everyone keeps complaining about the economy. It's as if we've been living in recessionary conditions even though things have been slowly improving. Put another way, we've had to work unusually hard just to enjoy very modest improvements in our standard of living.

The chart above uses the same data, but instead of a two-year rolling period, it uses a 5-yr rolling period. This, I believe, captures the effect of policies put in place by different presidential administrations. It can take years for policies to be put into effect and then have an impact on the economy, and good policies can have effects that last even after they have been reversed.

The colored bars correspond to different presidential terms, with the red bars reflecting a sustained period of declining productivity growth and the green bars a sustained period of very strong and/or rising productivity growth. I would be quick to note that Republican administrations have yielded three periods of declining productivity (Eisenhower, Nixon, and Bush II), while Democratic administrations have only yielded two periods of declining productivity (Carter and Obama). No political party can lay a claim to implementing policies that consistently lead to sustained rises in prosperity.

One thing that stands out is that the Obama years have seen productivity growth that rivals the malaise that characterized the Carter administration. For the five- and six-year periods ending last March, non-farm productivity rose at a miserably slow 0.5% annualized rate. In all of post-war history, only the five-year period ending in mid-1982 was worse. (Small footnote: Reagan's announced tax cuts did not take effect for almost two years, so his faulty implementation of tax cuts—which encouraged people to delay investments—only served to prolong the declining productivity of the Carter years).

There are many factors that contribute to the slow growth of productivity, such as rising regulatory burdens that increase the cost of economic activity, high marginal tax rates that reduce the incentive to work and invest and take risk, and transfer payments that create a culture of dependency and a reluctance to seek out work. John Cochrane has an excellent op-ed in the WSJ which expands on the reasons why this has been such a weak recovery: "Ending America's Slow-Growth Tailspin."

The charts above show that a significant increase in transfer payments (money the government gives to people for a variety of reasons) beginning in late 2008 corresponded to the beginnings of a significant decline in the labor force participation rate. Many millions of workers have left the workforce, and it could be due at least in part to the fact that the benefits that accrue to those not working (e.g., food stamps, disability payments, welfare, earned income credits, assistance to single-parent families) are greater than the net benefits of working, especially on an after-tax basis. Transfer payments now equal 20% of disposable income, and that is a big number that currently totals $2.74 trillion and consumes fully 73% of all federal government spending. Maybe it's simply the case that our government has grown to the point where it is now suffocating the private sector. Too few people are working and too many are on the receiving end of federal largesse. And for those who are still working, the burden of complying with regulations and the burden of taxes is inhibiting their ability and willingness to work and invest more.

We are not going to see significant improvement in productivity and living standards unless and until we adopt policies that are more conducive to work, investment, and risk-taking. It's that simple. Unfortunately, the proposals being discussed on the left (e.g., higher taxes on income and capital, plus higher minimum wages which price many young workers out of the market and inhibit new business formation) are only going to exacerbate the current situation. Trump sensibly advocates for lower and simpler income and business tax regimes, but his calls for trade protection are misguided and could weaken the economy.

Yesterday the level of uncertainty surrounding this year's presidential election was reduced as Trump became the presumptive Republican nominee. But uncertainty remains inordinately high since future policies could take either a positive or a negative direction, and by a lot, regardless of who wins. We know one of the eventual two candidates, but Hillary's candidacy remains deeply clouded by the ongoing FBI investigations. Such a level of uncertainty is not conducive to new investment and is not likely to be inflating equity prices—small comfort.

UPDATE: There is school of thought that holds that the productivity slowdown is the result of mismeasurement; that many valuable products (e.g., GPS, VoIP) are being given away for free. Here is a paper that considers whether this argument is supported by the facts. It concludes: " the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data." In other words, mismeasurement problems can't come close to explaining the magnitude of the decline in productivity. (HT: John Cochrane)


Rob said...

Today London will almost certainly vote in a new far-left Mayor with alleged sympathies for Islamist elements .. Europe and the UK is badly mired in this evil axis of failed socialism redux and a growing Islamic agenda. It's a bleak day for the UK's powerhouse and one of the great global cities.

Benjamin Cole said...

Trump is amazing. The deepest GOP bench in 30 years, and he cut them down like a hot knife through butter.

Just remember Ronald Reagan was the greatest protectionist since Herbert Hoover and Reagan implemented protectionist policies exceeding anything Trump has proposed.

At least I understand what many people find appealing about Trump.

Hillary Clinton, on the other hand, seems to stand for absolutely nothing in all situations.

But history has a funny way of turning out. Hillary's husband was president, and it was a great time for America.

George Bush jr. ? Harvard MBA, pro-business kind of guy. Likable. A train wreck into a sewage treatment plant.

Good luck everybody!

Frozen in the North said...


Sure Rubio was interesting, but there were some deeply flawed characters starting with Cruz, Carson and now Trump. What killed them all (aside from Trump) was that he was able to find their one obvious flaw and went full throttle. Bush's greatest flaw he looked as if he wanted to be anywhere but there. Frankly, from up North, Cruz looked like a really nasty SOB (Sorry Scott). The universal dislike by the people who knew him...

The most amazing thing in the current run for the WH is that both Clinton and Trump are off the scale in Dislike.

As for Rob

You know nothing of the UK, or London for that matter. The mayor of London has few real powers, the boroughs run the shop (aside for Transport). Its a megaphone for some smart ass (just look at the guy who left Boris Johnson). As for saying that the Brits are socilaists; clearly you have never been there!

Johnny Bee Dawg said...

There was no train wreck whatsoever under W until DEMs took over Congress in the Nov 2007 election...for the first time since the 1994 election.

Risk aversion explains the recession level productivity levels, and that's been caused by the lawlessness of Fundamental Transformation into socialism. We won't get rolling meaningfully until America decides to end this nitwittery and become great again.

Bring on the Trump Train! Toot toot!

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

"“I have argued that the myopic policymakers have no end game,” Druckenmiller said. "They stumble from one short-term fiscal or monetary stimulus to the next despite overwhelming evidence that they only produce a sugar high and grow unproductive debt that impedes long-term growth. Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggest we have borrowed so much from our future and for so long that the chickens are now coming home to roost.""

JBD, you are right about Bushneck, but this NE liberal's trains
started running later and later.

BTW, it was an interesting read, regarding the Federal Reserve Conspiracy. Many
new things that I learnt, however, the pirate guy whom was part of the conspiracy
sounded to much like the writings of the National Inquire.

There were, however, several salient points made by the author.

"On Friday, December 19, the Friday before Christmas when
Congressional thoughts were more on Christmas trees than money
trees, the Senate passed President Wilson's currency bill without further
ado by an overwhelming vote of 54 to 34. Every Democrat in the
Senate, plus six Republicans and one Progressive Republican, voted for
the Federal Reserve system. Against the Federal Reserve were 34

It was rush through the senate just like before - "we have to pass it
to see what is in it." Yes indeed, every fine Demco voted for the act, which
in itself should have raise a red flag.

" Most of Congress had no idea of
the contents of the Federal Reserve Bill signed by President Woodrow
Wilson who was in debt to Wall Street."

Perhaps the most significant piece of legislation in decades and it was Pelosied!

"The Federal Reserve has the power to create money. This money
is fiction, created out of nothing. This can be money in the form of
created credit through the discount window at which other banks
borrow at the discount rate of interest or it can be notes printed by the
Treasury and sold to the Fed and paid for by Fed-created funds."

This link should support the above paragraph, even tho it is difficult
to understand, as is the FRB's balance sheet.

The bankers were completely disingenuous, claiming not to support this
statute, but where instead in the vanguard to secure a central bank for
America, with one of their claims that the Panic of 1907 could have been

Now it is being suggested, that the FRB is going global.

Lawyer in NJ said...

As Brian Westbury, among others, has pointed out, I think its possible that there are measurement issues flowing from technological changes that are difficult to pick up in the data that are distorting productivity readings.

From March 3rd:

We suspect the government is underestimating output in the increasingly important service sector, which means growth and productivity are higher than the official data show. Have you used Google Maps lately? It will find the fastest route to your destination in real-time taking into account current traffic, weather, etc. And it’s all free! As the economy becomes more and more friction-free due to new apps and technologies, productivity rises, but it does not get fully picked up in statistics because many of these benefits are free for consumers. And anything free, no matter how much it improves everyday life, isn’t directly included in output – which means they aren’t directly included in productivity either. In turn, this means our standard of living is improving faster than the official reports show.

Alan Murray, in his daily email, makes a similar point today:

Robert Gordon's book "The Rise and Fall of American Growth" has become the new bible on productivity. The full tome requires a serious time commitment, but Chapter 17 gives Gordon's take on the role of innovation in productivity growth. He surveys the evidence and concludes there's no reason to expect a return to the productivity growth highs of 1994-2004, much less 1920-1970. I lack his economics pedigree, but can't help but disagree. Something big is afoot in the world of business, and-- eventually--the productivity numbers should show its effects. Former Treasury Secretary Lawrence Summers, whom I interviewed at Consensus, said he is inclined to agree.

McKibbinUSA said...

I am excited that Donald Trump will be the Republican nominee. The recovery, albeit lame, has run its course. We can now get on with outlawing deficit spending, trade deficits, and undeclared wars. Borders will be controlled for the first time in US history. The economic horrors inflicted on those born after 1955 by society's greatest generation will finally be acknowledged. The next 30 years will be hard for most Americans requiring great sacrifices. But our nation's greatness will glow once again for future generations. I am ready!

Rob said...

Frozen in the North: Um, I live just a few hundred meters from City Hall in London. have lived in the UK my entire life. Perhaps think before speaking next time ?

Andrew said...

There has been a small revolution in the business of oil and gas extraction.
Hydro fracking has increased the yield for oil drilling, which is another way of saying that the productivity of drilling has increased.
While I understand that oil drilling is just a small percentage of the work force, the use of oil and gas are so pervasive throughout the economy, I'm surprised that productivity has not increased.

Could it be that if we measured wages or good in the terms of barrels of oil, that a different conclusion would be reached?

steve said...

It is likely the whoever the next president is will preside over one doozy of a recession-just based on the fact that it's been eight years now. Moreover, I argue that the Fed has essentially PULLED economic growth from the future into the present by being too easy for too long. It seems the only "data" that they're really concerned about is the level of the DJIA! Forestalling a 20% drawdown is their chief mantra but of course that can only play for so long. Obama is without question the LUCKIEST president ever. I really abhor Trump's policies BUT the reason I'll vote for him?-supreme court. nuf said.

Hans said...

NJ, is this where your interview appeared?

Don't sell yourself short, as I am "inclined" to agree with you.

Frozen in the North said...


Then to say that the Mayor of London matters is really strange. Really you liked Boris? You think the next guy is going to matter any more than Boris?

Hans said...

What are the implication of declining US/Red China trade?

Hans said...

"As for saying that the Brits are socilaists; clearly you have never been there!"

Nothing like a Frozen Treat or a good punch up!

Grechster said...

Gambling lines suggest Hillary has a 72% chance of being the next president. Is it just me, or is that number too high?

Btw, you get 2:1 on a Trump bet (33% likelihood).

Benjamin Cole said...

Matthew G---Trump started his campaign by being perceived as somewhat hostile to Hispanics and women. Those are rather large voting groups.

But the guy knows what he's doing so, we'll see how it pans out.

Tom Nugent said...

Why do we analyze "non-farm" productivity? By eliminating one of the most productive sectors of our basic economy, we are understating the progress we continue to make. Back in the Seventies, the equivalent of today's "global warming" terrorists, was the Club of Rome that threatened that the world would starve to death due to population growth. How far we have come. Maybe we should also deduct electronic technology like the improvements in computer memory so that we can deduct both farm and technology advances from the productivity numbers so the powers that be can continue to complain about our lousy productivity numbers.

Unknown said...

An increase in productivity is by definition a decrease in labor usage which is also by definition means an increase in unemployment.

Tom Nugent said...

Not quite.
Productivity can also be achieved by employing more efficient machines in a process such as computer driven robots in the auto manufacturing business. The labor input might be the same but the productivity of the robots is substantially higher.