US Productivity Growth Highest in Half a Century
Toro @ Sun Jan 01, 2006 4:53 pm
To counter all the doom and gloom
$1:
The Most Important Economic News of the Year
By Arnold Kling : BIO | 29 Dec 2005
"[P]roductivity is the best single measure of what leads to differences in economic performance. Even though GDP per capita is the all-encompassing measure, GDP per capita is determined primarily, almost entirely, by productivity. People basically work in order to have a place to sleep and something to eat and so on and so forth. The huge differences around the world are the efficiencies with which they work -- their productivity."
-- William Lewis
Politicians and pundits re-assess the state of the economy often. They look at many short-term indicators and statistics. They follow statistics, such as the unemployment rate and inflation, which come out monthly. The sickest addicts even pay attention to other data that comes out weekly. My understanding is that the President receives a daily briefing on economic data.
Personally, I find this bizarre. The way I see it, there is no rational reason to try to assess the economy more frequently than every six months. The thrill that many journalists and economists obtain from "digesting" the daily minutia of economic reports is as puzzling to me as the enjoyment people get from playing the slot machines in Las Vegas.
My favorite indicator of the state of the U.S. economy is productivity, as measured by output per hour for the nonfarm business sector. This information is compiled by the Bureau of Labor Statistics (BLS), and it only comes out four times a year.
Even though productivity data are reported quarterly, it is not wise to pay attention to quarterly fluctuations. Most of us who follow productivity try to look for long-term trends. For this essay, I took the average annual growth rate of productivity over five-year periods. Taking a five-year average tends to smooth out the quarterly fluctuations. Although many experts use more sophisticated methods for filtering out short-term fluctuations, all of these methods result in minimizing the impact of any one quarter's data. If all the President wanted were a briefing on trend productivity, he could see his economic advisers once a term rather than once a day.
The table below presents annualized productivity growth for various five-year periods, starting with the period 1955-1960 (from the fourth quarter of 1955 to the fourth quarter of 1960).
Five-year average annual productivity growth, first quarter to first quarter:
Period Average Productivity Growth
1955-1960 2.03
1960-1965 2.79
1965-1970 2.09
1970-1975 2.31
1975-1980 1.55
1980-1985 1.38
1985-1990 1.65
1990-1995 1.59
1995-2000 2.28
2000-2005 3.39
What the table says is that the economy today is in great shape. The average productivity growth rate in the last five years is the highest over the past half century.
No Political Point-Scoring
What does this outstanding productivity performance say about economic policy under President Bush? Nothing. Let me repeat. Nothing. There is no political point-scoring to be made out of the news on productivity.
First of all, it is important to understand that, for the most part, productivity growth is the economy's gift to policymakers, not the other way around. It would be foolish to attribute to tax cuts that which ought to be attributed to Moore's Law.
Second, even when economic policy affects productivity growth, the effect comes with a long lag. We do not know how much of today's productivity growth reflects Clinton-era policies or Reagan-era policies or even the deregulation that began under President Carter.
Finally, one should not necessarily use these productivity figures to brag about anyone's economic policy. One could argue that our productivity growth really ought to be higher. In a column I wrote called Rationally Exuberant, I pointed out that computers are an ever larger-share of the economy. Suppose that productivity growth in the traditional economy is 1 percent per year and that productivity growth in computers is 50 percent per year. In that case, an economy that is 6 percent computers and 94 percent everything else should grow at a rate of 3.94 percent per year. If so, then perhaps from a policy perspective the question we ought to be asking is, "What are we doing wrong?"
The Great Race, Revisited
In a recent TCS interview, Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound.
In The Great Race, I argued that our economic future boils down to two trends. Moore's Law is raising productivity, helping to increase the size of the economy relative to government spending. On the other hand, Medicare is growing, which tends to increase government spending relative to the size of the economy.
In the 2-1/2 years since I wrote that essay, nothing has been done to slow the growth of Medicare. However, if the economy can sustain or increase its rate of productivity growth, the long-term outlook may be reasonably good. We are headed for the scenario that I called "affordable welfare state," meaning that the lavish benefits that we have promised ourselves when we get older will require relatively modest increases in tax rates. Tax revenues will be high because incomes and payrolls will be high.
The politicians have done nothing to slow the growth of entitlements. The mainstream media have totally missed the most important economic news of the early 21st century, which is the strong productivity growth. The state of the economy in 2005 is that it is performing well in spite of both the pols and the pundits.
By Arnold Kling : BIO | 29 Dec 2005
"[P]roductivity is the best single measure of what leads to differences in economic performance. Even though GDP per capita is the all-encompassing measure, GDP per capita is determined primarily, almost entirely, by productivity. People basically work in order to have a place to sleep and something to eat and so on and so forth. The huge differences around the world are the efficiencies with which they work -- their productivity."
-- William Lewis
Politicians and pundits re-assess the state of the economy often. They look at many short-term indicators and statistics. They follow statistics, such as the unemployment rate and inflation, which come out monthly. The sickest addicts even pay attention to other data that comes out weekly. My understanding is that the President receives a daily briefing on economic data.
Personally, I find this bizarre. The way I see it, there is no rational reason to try to assess the economy more frequently than every six months. The thrill that many journalists and economists obtain from "digesting" the daily minutia of economic reports is as puzzling to me as the enjoyment people get from playing the slot machines in Las Vegas.
My favorite indicator of the state of the U.S. economy is productivity, as measured by output per hour for the nonfarm business sector. This information is compiled by the Bureau of Labor Statistics (BLS), and it only comes out four times a year.
Even though productivity data are reported quarterly, it is not wise to pay attention to quarterly fluctuations. Most of us who follow productivity try to look for long-term trends. For this essay, I took the average annual growth rate of productivity over five-year periods. Taking a five-year average tends to smooth out the quarterly fluctuations. Although many experts use more sophisticated methods for filtering out short-term fluctuations, all of these methods result in minimizing the impact of any one quarter's data. If all the President wanted were a briefing on trend productivity, he could see his economic advisers once a term rather than once a day.
The table below presents annualized productivity growth for various five-year periods, starting with the period 1955-1960 (from the fourth quarter of 1955 to the fourth quarter of 1960).
Five-year average annual productivity growth, first quarter to first quarter:
Period Average Productivity Growth
1955-1960 2.03
1960-1965 2.79
1965-1970 2.09
1970-1975 2.31
1975-1980 1.55
1980-1985 1.38
1985-1990 1.65
1990-1995 1.59
1995-2000 2.28
2000-2005 3.39
What the table says is that the economy today is in great shape. The average productivity growth rate in the last five years is the highest over the past half century.
No Political Point-Scoring
What does this outstanding productivity performance say about economic policy under President Bush? Nothing. Let me repeat. Nothing. There is no political point-scoring to be made out of the news on productivity.
First of all, it is important to understand that, for the most part, productivity growth is the economy's gift to policymakers, not the other way around. It would be foolish to attribute to tax cuts that which ought to be attributed to Moore's Law.
Second, even when economic policy affects productivity growth, the effect comes with a long lag. We do not know how much of today's productivity growth reflects Clinton-era policies or Reagan-era policies or even the deregulation that began under President Carter.
Finally, one should not necessarily use these productivity figures to brag about anyone's economic policy. One could argue that our productivity growth really ought to be higher. In a column I wrote called Rationally Exuberant, I pointed out that computers are an ever larger-share of the economy. Suppose that productivity growth in the traditional economy is 1 percent per year and that productivity growth in computers is 50 percent per year. In that case, an economy that is 6 percent computers and 94 percent everything else should grow at a rate of 3.94 percent per year. If so, then perhaps from a policy perspective the question we ought to be asking is, "What are we doing wrong?"
The Great Race, Revisited
In a recent TCS interview, Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound.
In The Great Race, I argued that our economic future boils down to two trends. Moore's Law is raising productivity, helping to increase the size of the economy relative to government spending. On the other hand, Medicare is growing, which tends to increase government spending relative to the size of the economy.
In the 2-1/2 years since I wrote that essay, nothing has been done to slow the growth of Medicare. However, if the economy can sustain or increase its rate of productivity growth, the long-term outlook may be reasonably good. We are headed for the scenario that I called "affordable welfare state," meaning that the lavish benefits that we have promised ourselves when we get older will require relatively modest increases in tax rates. Tax revenues will be high because incomes and payrolls will be high.
The politicians have done nothing to slow the growth of entitlements. The mainstream media have totally missed the most important economic news of the early 21st century, which is the strong productivity growth. The state of the economy in 2005 is that it is performing well in spite of both the pols and the pundits.
http://www.tcsdaily.com/article.aspx?id=122805C
Scape @ Sun Jan 01, 2006 5:48 pm
$1:
Article after article declares that inflation has been kept in check between 2-3% annually. Shit, they even characterized Greenspan as an inflation-slayer!
But here I am, paying almost twice as much for a gallon of milk this year as I did last year, not to mention all other food groups. And of course, I'm paying a large chunk of my income (debt) for the damn gasoline I put in my car, not to mention subway fares, despite the claims that energy prices have relaxed. What gives?!!
No doubt, the mainstream media often LIES. I could go over examples ad nauseum. But more often than not, they merely massage the truth. Apparently, this is why those SOBs have been singing songs of victory over inflation:
Recent inflation data shows wholesale prices, excluding food and energy costs, have risen at a mere 2.6 percent for the last 12 months, while core consumer prices, which also exclude such volatile components, rose only 2.1 percent over the same period.
What on earth is left of "core consumer prices" after you've "excluded food and energy costs?!!" This sounds more like an inflation index for investors not consumers!
All this says is that within the group of products where consumer demand is elastic, prices are fairly stable. You're damn right they are! Consumers would stop buying in a heartbeat if they weren't! But, for goods that consumers have no choice but to buy, consumers are being screwed, royally!
In all fairness, I have to give credit to the author of this particular AP report, first for revealing the massaging technique her cohorts use to mask the truth. But also, for mentioning that bloggers like Jeff Matthews, who insists that his haircuts have gone from $17 to $22, are exposing the lies as they're told.
Caught again, lousy liars! If you're going to lie about something, pick a subject that's not as obvious as this. After all, we are the consumers!
But here I am, paying almost twice as much for a gallon of milk this year as I did last year, not to mention all other food groups. And of course, I'm paying a large chunk of my income (debt) for the damn gasoline I put in my car, not to mention subway fares, despite the claims that energy prices have relaxed. What gives?!!
No doubt, the mainstream media often LIES. I could go over examples ad nauseum. But more often than not, they merely massage the truth. Apparently, this is why those SOBs have been singing songs of victory over inflation:
Recent inflation data shows wholesale prices, excluding food and energy costs, have risen at a mere 2.6 percent for the last 12 months, while core consumer prices, which also exclude such volatile components, rose only 2.1 percent over the same period.
What on earth is left of "core consumer prices" after you've "excluded food and energy costs?!!" This sounds more like an inflation index for investors not consumers!
All this says is that within the group of products where consumer demand is elastic, prices are fairly stable. You're damn right they are! Consumers would stop buying in a heartbeat if they weren't! But, for goods that consumers have no choice but to buy, consumers are being screwed, royally!
In all fairness, I have to give credit to the author of this particular AP report, first for revealing the massaging technique her cohorts use to mask the truth. But also, for mentioning that bloggers like Jeff Matthews, who insists that his haircuts have gone from $17 to $22, are exposing the lies as they're told.
Caught again, lousy liars! If you're going to lie about something, pick a subject that's not as obvious as this. After all, we are the consumers!
LIAR, LIAR, economy on FIRE
Toro @ Sun Jan 01, 2006 9:47 pm
And?
The calculation of productivity includes all inflation, not core.
Granted, there are problems with hedonic adjustments when calculating inflation. However, rising productivity would explain why profits are at an all-time high, why inflation is low, and why total compensation has grown by as much as a 6% clip over the past year.