Slow growth? Why?

"As a matter of arithmetic, the slowdown in growth has two potential components: people working fewer hours, and less economic output being generated for each hour of labor. Both have contributed to the economy’s underperformance." -- Neil Irwin, 2016

"In order to hit the lower bound of the Trump target for 2017-2020, either contributions from labor force growth, or labor productivity, or combination thereof, must accelerate by 1.8 percentage points." -- Menzie Chinn, 2017

"The speed at which the economy can grow over a longer horizon is determined by changes in two main factors: the total amount people are working — which involves both the number of workers in the labor force and the hours they work — and the efficiency with which they produce goods and services." -- Dan Sichel, 2017

"The slowdown stems mainly from demographic trends that have slowed labor force growth, about which there is relatively little uncertainty. A larger challenge is productivity." -- John Fernald and Huiyu Li, 2019

 

People say the size of GDP depends on how much we produce per hour, and on how many hours we work. They say it a lot.

Hey,  you can even calculate it. Given the number of hours we work and how much we produce per hour, you just multiply them together to find out how much we produce.

But saying  the size of GDP depends on hours worked and output per hour is like saying those two factors cause GDP to be what it is. And that's pretty obvious bullshit, if you ask me. It's like saying that two and two causes four. I know: You can even calculate it. But arithmetic doesn't cause four. Arithmetic doesn't work that way. The economy doesn't work that way, either. 

Just for the record now:

1. Other things equal, it is true that if fewer people are working we will produce less, and if more people are working we will produce more. But it is also true that when the economy sucks, the fertility rate goes down, and you end up with fewer people as a result. So it works both ways: Demographics affects the economy, and the economy affects demographics.
2. Other things equal, it is true that an increase in productivity will boost output, and a decrease in productivity will reduce output. But it is also true, or at least some economists think it is true, that a high-output economy leads to higher productivity and a low-output economy leads to lower productivity. So again, it can work both ways.
   

I have no trouble accepting the idea that an increase in the labor force or an increase in productivity can boost economic output. But I cannot accept the ridiculous notion that nothing else plays a role in boosting output. 

Irwin, Chinn, Sichel, Fernald, and Li, I'm talking to you: How do you dare suggest such a thing??

 

 

Does it matter? Well, yes, because except for a brief interlude in the latter 1990s, productivity has been low since the economy got slow, around 1974. And according to Dan Sichel, labor force growth has been trending down since the 1980s. Both productivity and labor force growth have been down for a good long time. Is there a way out of this mess?

Raul Elizalde: 

Is there a way out? There are two possible scenarios for this story to end well. One is that policymakers develop a radical policy to deal with these challenges and implement it with exquisite finesse amid broad political support. Another is that a new technology revives growth by transforming the way we live or do things.

We can pretty much discard the first scenario for reasons we find obvious...

Yeah, okay. I liked Elizalde's GDP growth calculation a lot. But I have a problem with his two possible scenarios here:

1. a radical new policy to deal with these challenges, or
2. a new technology comes a long and saves the day.

Elizalde dismisses scenario number one right away. That leaves him in desperate hope of new technology. Hey, it could happen. I wouldn't put it past Elon Musk to make it happen with one hand behind his back. But I don't want to depend on that. I want to fix the economy. That leaves us with only

1. a radical new policy to deal with these challenges

the one Elizalde dismissed out of hand. I wouldn't dismiss it. But I am uncomfortable with it because it appears to presume there is nothing wrong with economic theory, and we just need better policy, but still policy that arises from existing theory. 

That will not do. Let me tweak the option a little: What we need is a more accurate understanding of our economy and its problems. 

Everybody was saying that in '09. But it only lasted about a year, I think, people saying that.

You know damn well that if economists had this more accurate understanding before 2007-2010, they might have been able to avoid that time of troubles. If they had that more accurate understanding long enough before 2007, they would certainly have been able to avoid those troubles.

 

 

We could start by going back to that brief interlude in the 1990s when the economy was good, and looking for what was different.

That's pretty well settled, isn't it? The internet was new. That's what was different. Everybody, even Alan Greenspan, attributed the improvement to "technology". And you know what else?

They stopped looking.