Friday, June 17, 2016

Syverson on the productivity slowdown

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.
An interesting read throughout. 

[Except for that last sentence, a near parody of academic caution!]  


  1. Interesting read. Although, isn't there another possibly "simpler" explanation: labor force age composition?

    1) The slow-down in labor productivity seems to coincide with an increase in the labor force share of 55+ individuals (and 65+ has also shot up quite dramatically), and a decrease in the labor share of 20-24 and 25-54 (teenage labor share also went down dramatically, but I'm not sure what the implications for them would be).

    2) Age ought to have some sort of inverted-U relationship with labor productivity. I.e., productivity increases with experience over time, but after a certain point, older people are less productive than younger people. (there is at least a demonstrated relationship like this with compensation, which however imperfectly, ought to map somewhat to productivity).

    3) So a "simple" explanation might simply be that the labor force is now composed of many more older folks who are past their prime. At least, the trend in slow down of growth coincide with the same trend in labor force age participation.

    We may have to wait until these older people retire.

    This trend also is likely to be similar across countries.

  2. I think John's point about Google Maps being free is very good. There are many very useful things now just being given away in the phone and web environments. I work in software and you see it very emphatically there. It used to cost millions of dollars to work with a database in a formal operating system environment. Now very good software is being given away that you can run on any pc that does the same thing. The physical objects that we purchase have gone down in price considerably and the time and trouble it takes to buy those objects is going down too.

    1. I have a different take on Google Maps. Google's strategy is to force you to have it installed and integrated into your smart phone OS. Google wants to come at you in as many ways as possible to tie you up. If you try to remove or disable Google apps your Droid, the OS can become unstable and crash (as mine did requiring a factory hard reset). How do you determine a “value” for Google Maps (or other apps): probably by some comparison measure of your alternative, or doing nothing at all - what did you do before "app." In my opinion, the real value is close to zero. Consumers can choose to not use Droid or Apple IOS, but alternatives are to do without or else very limited. So Google and Apple succeed in dominating the market and consumer choice (you). I have 29 (?) Google apps running on my cell phone and use very few of them. A person may feel like they gain added value using Droid and Apple IOS but the value of convenience is not easily measureable - what is the value of idle time and/or convenience. The “lasting value” to the economy is probably in the sustainable value, growth and technological innovation of Apple and Google, not economy wide economic value. Very different from value added from traditional economic activities say mineral extraction, goods manufacturing, building construction.

  3. "One Economic Sickness, Five Diagnoses" By N. Gregory Mankiw on June 17, 2016

    1. Martin Feldstein is currently working on an extensive paper arguing that inflation is overstated and that produtivity and real growth are understated. I believe it relates to inappropriate "quality" adjustments for goods and servicss.

  4. The trouble here is of the "where is my flying car" variety. Well, sort of.

    Google Maps is nice, but adds little value. After all, I never spent much of anything on maps, and hardly ever had notable trouble getting to my destination. So Google Maps is a nice toy as long as there is cell coverage. And the way one has to laboriously spoon info out of it bit by bit (constantly changing scale due to no ability to see details in Big Picture view; no scale of miles without a lot of fiddly tapping; etc.) is often annoying. And there are the legal problems using it while driving (well, duh, when do I need it??)

    The databases and much else tend to be similarly of limited use or of negative value, despite their shiny nerd appeal. Mostly they just waste lots of time shoveling vast quantities of unwanted advertising at a person. And the future of Big Data seems to be wasting ever more time & money coping with ever more opaque price-gouging, such as gross, random, airline-like electricity, Uber, and road-use overcharges.

    None of this helps with galloping housing, health, and education inflation, nor, really, with getting on and living real - as opposed to fake/virtual - life.

    On the other hand, being endlessly burdened with such matters, which would best be left as part of an invisible, smoothly functioning background of life, seems to have a bizarre appeal to economist types.

    I wonder why. It seems like an unintelligible paradigm for understanding or enhancing value. Maybe the ever-growing gap between techno-toy progress and real-life regress helps explain why so many people are so persuaded that things are going to hell in a handbasket that they vote for The Donald (and his European equivalents...

    1. All tied to...age.

      Of course, if I'm correct, it also means that things will continue to get...WORST...not better, as the overall population and labor force will continue getting older out to 2050.

      Healthcare costs increase as there are more older people. That's where the real costs of healthcare come from. Older people also always think that everything is going to hell in a handbasket...hence more of them, means more support for crazy populists like The Donald.

      Older people also means...lower productivity, since an individual's labor productivity likely diminishes after a certain point.

      Them not being able to use modern technology, also explains why they think there's some sort of "gap" between techno-nerds and themselves.

      As for the value of Google's value is really in terms of time. Time not spend getting lost, time not spend figuring out directions, time not spend searching for geographic or spatial information, time not spend trying to figure out different options. It is, in fact, quite revolutionary.

  5. I think looking at the economy in a more granular way, than the typical macro-economic policy maker does is informative. Productivity increases are not things that happen to the entire economy at once. They occur because of technological changes, management innovations, and investments in individual businesses, usual in one sector of the economy.

    A century ago most Americans were farmers. Various innovations and investments increased the productivity of that sector to the point that the sector employes less than 2% of the labor force but feeds more people at lower cost than ever. Similar stories can be told in many other sectors, including manufacturing, logistics, and even retail.

    But, productivity increases, like every thing else, are subject to the law of declining marginal utility. The first unit of innovation or investment will produce a much larger impact than the nth. We often see S curves of innovation. The first Wright Brother's flyer was not very useful. But, a generation later, in the mid 1930s, there was an airline transportation business. A generation after that, in the mid 1960s, the first 747s were put into service. Today's 747-800 is no doubt a better machine, but the improvements are in detail. I would guess that similar stories can be told about other technologies.

    But, the success stories are not repeated in every sector of the economy. Health care spending is more than one sixth of the GDP. In no other OECD country does it exceed one eighth. It is not a function of wealth. By most measures Switzerland has a per-capita GDP equal to or greater than the US and its people are just as healthy as Americans, but its health care system is only 11.5% of GDP. Bringing the US back into line with the rest of the OECD means either an enormous cut back in health care expenditures or an enormous expansion of growth in other sectors.

    Clearly, the health care system is one of the most heavily government involved sectors of the economy. The US has far fewer physicians per capita than other OECD countries. The number of physicians is determined by the Federal government, that is the sole funder of residency training. Examples could be multiplied. Doctors offices are the only businesses in the country that still use faxes. Why? Federal regulations.

    Other sectors that are heavily government involved are also resistant to productivity improvements. How about eduction? Why do professors still give lectures? Haven't they heard of video recording. We could go on and on. What about government itself? How about housing? Every year sees the addition of regulatory barriers to the production of new housing. San Francisco is about to adopt rent control. Why don't they drop an atomic bomb on the place. It would be less damaging.

    1. You're talking about different things here. Health care expenditures in the US are higher than in Switzerland, even though per capita Switzerland spends more...because healthcare expenditures as a % of GDP are not measuring the same thing in both economies!

      This is of course the favorite talking point of liberals and Leftists on why the US is supposedly "so bad".

      The problem is, health an INDUSTRY...encompasses a much broader set of activities in the US than in Switzerland. For example, medical research (which then those Swiss hospitals can get without incurring the development costs, since we incur them).

      So health care as a % of GDP is a meaningless metric. Much of that healthcare expenditure in the US isn't going to provide healthcare to individuals in the US. It's going to develop technologies and innovation, which are used everywhere.

      So why should I see a problem in MD Anderson spending billions on cancer research?

    2. there is also some evidence that Health Care spending is a "Superior Good", i.e. has an income/wealth demand elasticity greater than one. So as a nation increases income, it will naturally devote an ever higher proportion of spending on health care.

  6. Fat Man raises an interesting point, not about a-bombs, but about housing shortages. If the West Coast moved to unzone property there would be a boom in housing construction, and lower living costs. Thus people would have a higher standard of living, without any increase in productivity.

  7. "Why we have, and probably will keep having, sluggish job growth" By Michael Barone • 6/19/16

    "Why has the American economy had such sluggish job creation and economic growth? That's a pretty fundamental question, and one for which most conventional economists offer unsatisfying answers. Clues can be found, I think, in the new book by the unconventional economist and blogger Arnold Kling, "Specialization and Trade: A Re-Introduction to Economics". It is, among other things, a polemic against macroeconomists who treat the economy as what Kling calls a "GDP factory" and who assume that policymakers can get it producing more by just stepping a little harder on the gas pedal, with federal stimulus spending or low interest rates."

    * * *

    "Kling sees the economy as the constantly changing sum total of firms, entrepreneurs and individuals specializing in certain work and trading with each other. In a typical month, it both destroys and creates about 4 million jobs. If the number destroyed persistently exceeds the number created, you have a recession. If the number created only narrowly exceeds the number destroyed, you have what we've been living with for the last nine years."

    * * *

    "In an economy in which patterns of specialization and trade are always changing, Kling argues, it's impossible to maintain stable local employment patterns. Some places shed jobs, in others they are created. Many people need to move to maximize opportunity. These days fewer do.

    "Why? One reason is the explosion in the number of people receiving disability insurance — it's tripled since 1980, doubled since 1995. West Virginia, despite low job creation, has seen little domestic out-migration. Not coincidentally, it has the highest rate of disability payments. People once left the mountains, for Michigan in the 1940s, Texas in the 1990s. Now they stay put and wait for $13,000 in annual DI."


    I have not yet read Kling's book: BTW it is an e-book that costs only $3.19. Even I can afford it.

    It sounds like an Austrian oriented analysis from the review above. I am very sympathetic that that kind of thought. My argument above comes from that direction.

    1. Or...that would fit my explanation as well. More old people, more DI, less labor mobility.

      I just don't think it's a coincidence that this slow-down, which has been going on for 16 years now actually as it first started around 2000 or so...coincides with increases in the labor force share of 55+ individuals.

      This is a structural problem in labor, and one which (if my idea is correct) would imply that the problem will only get worst and isn't going away for a few more decades.

  8. Or, the US Federal Reserve is running extraordinarily tight monetary policy, which produces extraordinarily low interest rates and slow nominal growth.

    The available low hanging fruit productivity-enhancing innovations are not undertaken, because investors rightly assume that money and nominal growth will remain tight and slow.

    When the Fed eases policy, interest rates rise, and nominal growth accelerates, a vast number of innovations will be deployed, and marginal productivity rise.

    Note that the labor markets are saying the same thing -- low and falling participation rates. There is an enormous amount of idle technology and population in the US, all because of tight money.

    In short, investors assume nominal growth will remain low, and so investment in productivity will not pay very well.

    1. "the US Federal Reserve is running extraordinarily tight monetary policy"


      You would rather pay higher interest on a business loan?
      Because THAT would help you deploy "a vast number of innovations"?

    2. Anon: Interest rates are a symptom of nominal growth; nominal growth is a symptom of monetary policy. Rates are a market outcome of the price of money, not a cause in themselves -- they are just the price of debt, that's all.

      Was US monetary policy tight or loose in the late 1970's, when rates approached double-digits?

      Re-read, please:
      "The Interest Rate Fallacy

      Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

      Japan's recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. The monetary collapse was far greater in the United States than in Japan, which is why the economic collapse was far more severe. The United States revived when monetary growth resumed, as Japan will.

      The Fed pointed to low interest rates as evidence that it was following an easy money policy and never mentioned the quantity of money. The governor of the Bank of Japan, in a speech on June 27, 1997, referred to the "drastic monetary measures" that the bank took in 1995 as evidence of "the easy stance of monetary policy." He too did not mention the quantity of money. Judged by the discount rate, which was reduced from 1.75 percent to 0.5 percent, the measures were drastic. Judged by monetary growth, they were too little too late, raising monetary growth from 1.5 percent a year in the prior three and a half years to only 3.25 percent in the next two and a half.

      After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die."

  9. I am kind of attracted to Eric Falkenstein's point that satisfaction is rivalrous. He says that makes the equity risk premium irrelevant. I say that makes aggregation of utility, which is the foundation of "real output", even more troublesome now than in the past. And this carries straight through to productivity.

    The idea that satisfaction is rivalrous is an ugly one because it would seem to foster conflict. I would be all in favor of (mostly) pretending it is not an issue in the interest of limited government, freedom and social peace. So please don't start calling me names. But I think this is a real thing that makes measurement very tough. The idea that we can discern something called "real output" is increasingly implausible.

  10. It is not PC to mention, but there are 4 million Americans receiving disability insurance through the VA. There are about 8 million receiving DI through Social Security.

    The VA recipients tend to be younger. I predict that rapidly expanding disability rolls of the VA will not become a PC topic in right-wing circles.

  11. I haven't finished reading the paper, but I'm already seeing serious mismeasurement of "the measurement problem". For example Syverson states that given the aggregate productivity measured "[for Information and Communications Technologies] true labor productivity in the industries would have risen 363% over 11 years." Eleven years is 7 1/3 cycles of Moore's Law, which at constant output in number of CPUs, would produce productivity growth of total computations produced per worker per year of 16,127%! Disk storage and network bandwidth grow even faster than Moore's Law, so ICT as a whole suffers from even more severe measurement errors in this paper.

    I also don't understand why he uses broadband penetration as his measure of "labor productivity". "Broadband" generally refers to consumer technology -- workplace networking is often one or two orders of magnitude faster, unless you happen to live in a Google Fiber city like Kansas City or Austin. Workplace ICT capability is dependent on software, which has become much more complex without becoming that much more functional over the past 20 years. Many business administrative activities that nowdays run on PCs' web browsers don't do that much more than the same business function did with an old green-screen IBM 3270 block mode terminal. Except that the internet allows them to be performed from Costa Rica or Bangalore where labor costs are 10% of the costs in Little Rock, Arkansas.

    These things are admittedly hard to measure, but they lead to much larger error bars on the results (what error bars??) and cast doubt on the reliability of the conclusions.


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