Thursday, May 2, 2019

Productivity makes a comeback

Productivity is essential to economic growth and progress, so it's great news that productivity has picked up in the past two years. Productivity happens when an economy produces more from a given level of input, and that in turn usually means that businesses have invested in productivity-enhancing things such as machinery, tools, and computers, all of which allow workers to produce more with a given amount of effort or time. Productivity is also likely to result from a reduction in the costs of running a business, and that in turn usually means less red-tape, and reduced tax and regulatory burdens. Rising confidence can also help, since that helps give people the courage to work harder and take risk. Rising confidence can also make entrepreneurs more inclined to start new businesses and expand existing ones.

Chart #1

Happily, business investment has picked up in recent years, tax and regulatory burdens have declined, and confidence has surged. Even though jobs growth hasn't picked up much, if at all, in recent years, output has (see Chart #1). That's productivity in a nutshell: getting more output from a given amount of input.

Chart #2

Today we learned that first quarter productivity rose at a surprisingly strong 3.6% annual rate. Chart #2 shows the year over year change in productivity, and how the recent pickup coincides with the beginning of the Trump Administration.

Chart #3

However, productivity can be and usually is a volatile statistic on a quarterly and even annual basis, which is why I like to use a 2-yr rolling average (see Chart #3). I've also added recession bars in this chart, since they show how changes in the trend growth of volatility have a lot to do with the business cycle (not surprisingly). Productivity typically picks up after a recession ends, and it usually—but not always—fades as the business cycle matures. The current business cycle got off to a bang with very strong productivity growth in the last three quarters of 2009, but then it quickly faded, only to experience sluggish growth for the next 5+ years. It's picked up meaningfully in the past two years, and we are likely still in the early innings of a great productivity comeback.

Chart #4

Chart #4 reduces the volatility of productivity even more, by using a 5-yr rolling annualized average.  This captures the important growth trends which persist for years. The chart also overlays the many different presidencies we've had in the post-War period. I've color-coded each presidency using red for presidencies that saw productivity fall, and green for those that saw productivity rise. The Reagan and Clinton years stand out for their sustained increases in productivity, while the Bush II and Obama years stand out for their sustained productivity declines. This is very instructive: the pro-growth policies of Reagan and Clinton (mainly in his second term) worked because they incentivized private sector work, investment and risk-taking, and that in turn boosted productivity and living standards. Bush II and Obama policies were anti-growth, characterized by increased tax and regulatory burdens and a more intrusive state.

In Trump's first two years there has been a huge and unprecedented reduction in the number of federal rules with adverse economic impacts put into effect, as documented by the GWU Regulatory Studies Center (see Charts #5, 6, and 7):

Chart #5

Chart #6

Chart #7

Chart #8

As Chart #8 shows, Trump's election marked a sea-change in consumer confidence right around the time that productivity began to turn up. We saw a similar improvement in confidence halfway through Clinton's Administration (1997), and that too saw a big pickup in productivity and economic growth.

Chart #9

As Chart #9 shows, Trump's election coincided with the biggest increase in Small Business Optimism in decades. Small businesses are the biggest source of jobs and innovation.

The productivity stars are aligned: rising confidence and reduced tax and regulatory burdens have created the conditions for a big productivity comeback that could last for years. We're just beginning to see the results, and they are encouraging. This gives the economy plenty of upside potential, which in turn means that living standards for nearly everyone should be improving for the foreseeable future.

Memo to all those would-be socialists eyeing the 2020 elections: income redistribution, higher taxes, increased regulations, mushrooming bureaucracies and handing out freebies (e.g., free college, student loan forgiveness, single-payer healthcare) don't create the conditions for increased productivity and rising living standards. On the contrary, they will only make things worse for everyone.


steve said...

Milton Friedman, the greatest economist ever once said when responding to "who would you nominate for the Fed", "a computer". I would never argue with Friedman re economics. So Scott, what do you think about this piece?

Benjamin Cole said...

I have always suspected that a sustained business recovery would ultimately result in higher productivity gains---the 1990s scenario, in other words.

The best way to beat back the socialists will be tight, tight and tighter labor markets for a couple generations.

Let it rip. President Trump has more than a few flaws, as do I, but we have both been right on monetary policy.

Frozen in the North said...

To steve: YOu don't appoint a to appoint a programmer, and you assume that the programmer understand what are the parameters

To Benjamin Cole: All this talk of Productivity reminds me that while we can measure productivity it is almost impossible to influence its increase. Studies after studies have shown that there is no specific reason why productivity rises or falls. Productivity is the single most important economic indicator for an economy, as an economist, it pains me to say that there is no strong correlation to how and why it rises or for that matter falls

Scott Grannis said...

steve, re Cullen Roche: I'm not impressed with Roche's criticisms of Steve Moore. Roche may think he understands how the Fed works better than Moore does, but he's wrong. I've known Steve Moore for 30 years and I can vouch for the fact that he has a deep understanding of economics and monetary policy. I would also point out that both Roche and Moore are effectively arguing for a monetary policy rule. Moore wants a commodity price rule, Roche wants an inflation-targeting rule. Both could work, and both would reduce the likelihood of discretionary errors. If I had to choose, I would side with Steve Moore and his recommended approach to monetary policy.

Al said...

What a great review Scott.

Excellent post.

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

Trump's regulatory rollbacks have allowed the continued use of dangerous pesticides, toxic air pollution by coal plants, and the discharge of poison into the water supply. If Trump gets his way, the problem will get even worse. His EPA has proposed regulations that roll back caps on the amount of carbon dioxide and other pollutants coal plants pump into the atmosphere. The new standards are expected to cost 11,000 lives every year. No short term juicing of corporate profits can compensate for the costs of these rollbacks to the health of the American people and the planet.

steve said...

Ian, I would suggest that your expand your reading beyond the tendentious to rather more balanced. I've found the WSJ while admittedly conservative is certainly no great friend of Trump.

Regulation will never solve great problems. Technology, loosed by the forces of capitalism will however.

Ian said...


I read all sorts of things, including the WSJ. Have they proved I'm wrong about the facts? If not, then they don't matter.

When I hear people like you, I wonder, does this person realize that laws are also regulations, and does their libertarian ideology make them reject the whole idea of laws? It seems to me that rampant murder is a great problem in pre-state societies, and that the law that forbids murder is a solution to it.

If Trump and his gang roll back legislation that would prevent 11,000 deaths per year, it seems to me that they are mass murderers. If you believe that there should be laws against mass murder, then you should support regulations limiting pollution by coal plants.

Scott Grannis said...

Ian: carbon dioxide is not a pollutant, it is absolutely essential to life on earth. The argument that links coal plant CO2 emissions to the future death of 11,000 people is extremely weak, supported mainly by assumptions that have no scientific basis in fact. No one has been able to scientifically demonstrate the impact of CO2 concentrations on global temperatures. Even if you assume that there is an impact, it does not necessarily follow that a few degrees of global warming pose an existential threat to mankind.

And please don't revert to the argument, as so many do, that there is a strong scientific consensus that supports the theory of global warming. Science does not operate on the basis of consensus; it operates on provable hypotheses. No one has yet to come up with a hypothesis about how global climate responds to an increase in CO2 concentrations that has been rigorously tested and proven. No one. All attempts to date to predict global temperatures on the basis of CO2 concentrations have proven to wildly over-estimate the actual degree of warming. Global climate is something we do not fully understand.

Ian said...


When I read words like yours, I am flabbergasted. You're obviously an extremely smart man, as you produce analysis of the economy and finance that I find insightful. But when it comes to one of the best supported scientific hypotheses ever, you manage to remain blind. Psychologists have argued that smart people often use their intelligence not to see the truth, but to defend their biases and delusions. You seem to be a case of that.

The four hottest years in history have occurred in the past four years. 20 of the hottest years in history have occurred in the past 22 years.

You want a scientific theory, do you? The essence of science lies in prediction. For decades climate scientists predicted that temperatures would rise because of increased C02, and then it happened.

The relationship between C02 and heat conservation has been extensively studied and established through a multitude of convergent evidence. There's a summary here:

The EPA did not claim that 11,000 per year would die due to C02, but due to emissions of mercury, arsenic, and other toxic chemicals from coal plants.

You and your fellow Republicans voted to put a criminal gang in the White House, and now you're collaborating with them in committing mass murder. It's deeply sad the way you use your intelligence not to benefit humanity, but in service of your short-sighted destructive greed.

steve said...

Arguing with people like you is like spitting in the wind. Anyone who disagrees with you is a murderer! That's lovely Ian. Find another blog to remonstrate.

Fred said...

well it sure feels like it's hotter in Atlanta than it was when I first moved here 33 years ago but I think most reasonable scientists would say there is no way we can do much about global warming without throwing the world into a deep depression and even then we may only affect the temperature a degree or two. Check out Cliff Mass weather blog. He seems to know what he's doing on the subject. I am putting off buying my dream home by the shore and will instead get a mountain retreat where it's nice and cool ( right now at least).

Ian said...

Fred, that property choice is smart. For some optimism about solving climate change, check out

WealthMony said...

I do not know why Ian and all you guys have gotten your drawers tied in a wad. Fred, you better get that mountain retreat pronto because we've now got less than 12 years to the end. I am left wondering how many decades it is that these climate scientists have been warning that temperatures were rising because of CO2. Ian, how many years ago does your "in history" contain? Are we talking 100, or 1 million or 100 million? Here I am adding up all these 11,000 people being murdered each year by this criminal gang in the White House and their Republican sponsors that include Scott and comparing that with the millions Ian's Democrat comrads have indirectly murdered year-after-year since 1973. Now that is quite a contrast. That being said, I am all for clean air, clean water and clean hands.

Now, back to the real topic of this blog. Frozen, your comments puzzle me: "there is no specific reason why productivity rises or falls. Productivity is the single most important economic indicator for an economy, as an economist, it pains me to say that there is no strong correlation to how and why it rises or for that matter falls." Rather than getting off track with Ian's rant, I would hope to see more comments regarding this statement from you. Don't we know that over the centuries new technologies or methods have improved productivity? Do you mind making further comment? If so, please do, or give us some references.

randy said...

It is reasonable for scientists and policy makers to be concerned about rising C02 levels and their potential impact. Policy can't wait for long-term data to prove theories right or wrong - consensus that some level of warming will happen is enough for thoughtful people to recognize the issue is worthy of attention.

In my view, where it falls apart is two-fold.
1 - institutional alarmism based on completely un-provable and certainly wrong models about what's going to happen in 80 years. The math is certainly wrong (we don't know which way), and does not consider technologies that we can't even envision now that will change the problem completely. Someone may figure out fusion next year. The industrial size carbon scrubbers are damn near viable now.
2 - the eco-religious insistance that not only must one swallow all the alarmism, but we must also accept their "solutions" as the only solutions, regardless of cost or any measure of viability or efficacy. To ask questions means you are a climate change denier. If the eco-religious were serious about the global warming risk, then we would be embracing nuclear, and converting coal plants to natural gas with the same fervor as installing windmills. For every climate activist I know, those are non-starters. So... I don't take them serious.

Germany and California have been leaders in windmills and solar installations. And their energy costs are much higher than their neighbors, while their per capita CO2 emissions are higher as well. We are closing nuclear plants here so that state governments can meet "feel good" renewable targets - which usually results in a coal plant (in place of the zero-emissions nuclear) to backup the fickle wind and solar. Emissions go up. Waiting for eco-activists to get serious.

The new Chernobyl movie seems ripe propaganda. More people die installing solar panels than died in nuclear accidents.

WealthMony said...

Randy---excellent contribution. I am amazed at your comments: "Germany and California have been leaders in windmills and solar installations. And their energy costs are much higher than their neighbors, while their per capita CO2 emissions are higher as well." What gives?

randy said...


Solar and wind thus require that natural gas plants, hydro-electric dams, batteries or some other form of reliable power be ready at a moment’s notice to start churning out electricity when the wind stops blowing and the sun stops shining.

And unreliability requires solar- and/or wind-heavy places like Germany, California and Denmark to pay neighboring nations or states to take their solar and wind energy when they are producing too much of it.

Ian said...


There is a substantial contingent of environmentalists who are supportive of nuclear energy, at least to the extent of believing that existing nuclear power plants should be maintained. Unfortunately, many power plants around the world have been closed down, and many more are scheduled to. There has been a lot of change in environmentalist thinking on this issue in recent years, and now a lot of environmentalists, and probably even most of them, believe in keeping existing nuclear power plants.

However, building more nuclear power plants is probably not the long-term solution to our energy needs. These power plants are incredibly expensive and take decades to build. Moreover, there is the question of uranium supply. There are only enough viable uranium reserves to supply five years of electricity at current usage levels. And if we're going to solve climate change, we're going to have to use a lot more electricity. We're going to have to start powering transportation and industrial processes by electricity rather than by fossil fuels. It's highly doubtful that enough uranium exists to last us more than a few years. Solutions to this problem have been proposed, but they are speculative. For a summary of this problem and other problems with nuclear power, see:

Natural gas is by no means the solution to our energy needs. Natural gas is methane, which is a greenhouse gas far more harmful than C02. It is likely that all the natural gas released into the atmosphere through extraction processes and leaks eliminates whatever benefit it brings through C02 reductions.

That leaves us with renewables. Yes, it is true that power costs more in places that have significant adoption of renewables. These are temporary growing pains, however. It isn't surprising that the rollout of new technology would be expensive. The intermittency problems of renewables are not hard to mitigate. Improving energy storage capacity is one solution. Others are long-distance power lines and energy usage optimization through smart grid technologies. Ramez Naam offers good perspective on these issues:

We can't wait for a deus ex machina like fusion to save us. Rather, we have to ramp up building out renewables and a grid optimized for renewables now. The world has already started doing this. Globally, most of new power generation being built comes from renewables. Renewables provide 40% of total power generation in Germany and Spain, 38% in China, and 33% in the UK. We can preserve a livable earth. We just need to keep on going on in the same direction, only faster. And I think we're going to.

randy said...


Good response. The arguments are difficult ones, because with every statement you can get buried in the weeds about the assumptions in the statement.

For instance, how is cost defined. The per kW costs cited usually don't include substantial renewable subsidies. Renewable metrics also like to cite production units not utilization units, since a good bit of renewable energy is produced that can't be used either because of demand timing issues or lack of transportation. Costs to build nuclear are over-stated by massive environmental and safety hurdles that are arguably excessive and/or instigated primarily to thwart nuclear. There are stories that the Sierra Club had a hand in early litigation - not because of true environmental concerns, rather just because they are anti-growth and didn't want more power enabling more people to live in CA. Construction costs reference legacy designs when more modern, modular designs are much more effective. Renewables always get the benefit of "we will work out the problems" - storage, transportation, life cycle, disposal, mining, etc - but natural gas and nuclear challenges are deemed insurmountable.

But you are probably well aware of all that and have good arguments for your positions. I'm glad there are renewable advocates that at least try to be realistic. The best answer is likely "all of the above".

Frozen in the North said...


Yeah, I too thought that this conversation was going off the rail! Although I've to go say that if technology is to replace regulation (against pollution) the issue is an incentive, the polluter has zero cost, therefore no incentive to change.

As for productivity, its a favorite of Canadian economist (there you go), over the years Canada has tried to figure out why its productivity was lower than in the US, the conclusion is that its not just one factor, and policy cannot be made to accommodate these factors since they are sometimes negatively correlated.

The frustration has always been "there are no policy tools to influence productivity" Sometimes you do nothing and productivity rises...

Also Randy, get more up do date date on "Green energy" the facts are as follows: the cost of producing a KW of electricity using coal or Nuclear is higher than using wind or solar, forget subsidies and the fact that coal extractors are still polluting at will, moreover, the cost of producing electricity using solar is still dropping (now less than 1.5c/w/h) and will drop below 1.0c/w/h within the next 5 years.

The industries that need support are: coal and Nuclear -- not the other way around (moreover that doesn't take into consideration externalities)

randy said...

Now back to complaining about Trump trade policies.

steve said...

Just when you think we're laughing, Trump decides to "get tough" with China re trade. He is seriously so obtuse on this issue as to defy any explanation. He is literally trying to FORCE Americans to buy more US produced goods Vs Chinese under some misguided notion that we as a nation would be better off. How about the fact that American consumers prefer international goods over domestic for any number of their own personal reasons? It's called preference! Price, quality, whatever the reason it is frankly none of the governments damn business.

Roy said...

In the past 10 years, there has been plenty of research that proves the negative impact of air pollution on health. Even when one is exposed over the years to very low levels it would could cause health issues in the long term. For example, living next to a main road for many years in an otherwise "clean" environment would have an impact on your health. It might not kill you, but the probability is higher that your quality of life would be reduced at an older age.

"Coal combustion releases nitrogen oxides, sulfur dioxide, particulate matter (PM), mercury, and dozens of other substances "

A common mistake is that people assume that air pollution only impacts the lungs. Fact is that many particulates are small enough to enter directly into the bloodstream and reach every part of the body.

Reducing air pollution is a no-brainer.

Cognitive dissonance is a bitch.

steve said...

Good question.

The Cliff Claven of Finance said...

Scott said:

"The four hottest years in history have occurred in the past four years. 20 of the hottest years in history have occurred in the past 22 years."

Scott, I have been reading climate science as a hobby for 21 years. started a climate science blog in 2014 that has had over 34,000 page views -- over 2,200 in the past month.

The real time temperature record starts in 1880 FURING a warming trend that started in 1950. New records are EXPECTED regularly until the warming trend ends. And every past warming trend on our planet HAS ended.

You use the phrase "in history" but 99.999% of Earth's 4.5 billion year history has NO real time temperature data to compute a global average temperature.

The current temperature on our planet is believed by geologists to unusually cool, not hot, with unusually low levels of atmospheric CO2.

The claimed global average temperature increase since 1880 is only +1 degree C. = totally harmless.

The global warming from 1998 through 2018 was nearly zero -- a statistically insignificant change.

The temperature of our planet is believed to be about +15 degrees C. cooler since the age of the dinosaurs -- live thrived back then with lots of heat, and incredible amounts of greenery, that most of those HUGE reptiles survived on.

We have been hearing scary climate predictions since 1957 (Oceanographer Roger Revelle)

They have been wrong for over 60 years, so far.

In fact there has been global warming for over 300 years, since the 1690s, measured at +3 degrees C. in central England (few thermometers anywhere else at the time) that was good news all the way through 2018. No more than 15% of that +3 degrees C. warming could have been caused by man made CO2 emissions, assuming any was.

Past global warming was 100% good news.

Future global warming is always predicted to be 100% bad news.

That makes no sense -- only a gullible person would believe it.

I'm afraid you are such a person.

My climate science blog is free, and has had over 100 page views today -- you need to learn something about climate science, but I'm afraid it's too late, so here's a quick summary: Wild guess, always wrong, predictions of the future climate, are not real science. In real science, wrong predictions falsify a theory. But in climate change junk science, wrong predictions make you famous, and admired, as someone who cares about the planet. Especially if the predictions are really scary -- for example" Al "The Blimp" Gore. No one seems to care that all Gore's predictions have been wrong since the 1980s.

And assuming you've read this far -- there has been no global warming from 1998 to the end of 2018 -- statistically insignificant -- which means less than the very small (hard to believe) margins of error claimed for global average temperature statistics.

Grechster said...

Cliff: I really enjoyed your post on global warming. I'm one of those guys who remains open-minded on the issue but suspect all these hysterical claims have agendas other than doing what's best for the planet. In any event, I defer to guys like you who have actually studied the issue over time. It's refreshing to read a take that doesn't heighten the hysteria. Good on ya.

The Cliff Claven of Finance said...

My prior long-winded comment on climate change was actually addressed to Ian, I don't know why I typed "Scott".
I didn't want to comment on Ian's last paragraph ... but it annoyed me so now I will comment:

Ian sez:
"You and your fellow Republicans voted to put a criminal gang in the White House, and now you're collaborating with them in committing mass murder. It's deeply sad the way you use your intelligence not to benefit humanity, but in service of your short-sighted destructive greed."

I'm not a Republican, so can comment without bias: After four investigations (Obama FBI for at lest nine months, two Congressional, and the 22-month Mueller investigation), Trump has been investigated more than any other president. The result - conclusive proof there is no criminal gang in the White House.

There WAS a criminal gang in the Obama Administration -- I'm writing a five-page article on the subject right now -- ... weaponizing the FBI, Justice Department and intelligence agencies, to destroy the Trump campaign. I am thankful they failed, because they were incompetent criminals. I expect some of them to get prison terms with Bill Barr as Attorney General.

Mass murder" -- what are you talking about Ian ?

Ian, you have identified yourself as a leftist, with your unjustified attack on Mr. Grannis, and an obvious hatred of anyone with different views than you. You may go through life being miserable, and hating the US, while Mr. Grannis goes though life being optimistic, and loving this nation.

I'm not a big Mr. Grannis fan -- I think he's too optimistic -- probably because he is a long-term Apple investor, and has a beautiful wife -- that would make anyone overoptimistic -- but an optimist is certainly much easier to take than your nasty diatribe at Mr. Grannis.

Productivity making a comeback is great news if it lasts -- it deserves to be mentioned -- and that's exactly what Mr. Grannis did.

The Cliff Claven of Finance said...

Thank you Grechster;
Everyone on this planet who is less than 78 years old has lived all their lives with rising CO2 levels, and mild, intermittent global warming ( since 1940 ).

Actual experience with rising CO2 and warming does not seem to matter to the climate alarmists.

Only wild guess, always wrong predictions of a coming climate catastrophe seem to mater !

The wild guesses started in 1957, and ramped up a lot in the late 1980s.

The always wrong predictions call for a global warming rate QUADRUPLE the actual global warming rate since 1940
(+ 3 degrees C. per century warming rate predicted, since the 1970s, vs +0.77 degrees C. actual warming rate per century during the 1940 through 2018 period).

Alexandria Ocasionally Coherent said the world would end in 12 years.

Robert Francis "Beto" O'Rourke (the hand waving guy) topped that with 10 years until the end.

Would anyone here like to bet that some other Dumbocrat, er I mean Democrat, will announce a number less than ten years?

steve said...

Why is that the left is so GD pessimistic. All of you!