Before I get into the meat of this post, I just want to point out that I am really quite fond of Scott Sumner. Over the years, he has provided somewhat of an education to anyone who paid attention, and it reminds a little of Benjamin Franklin, the man who gave away his designs for the potbelly stove and eyeglasses for good of humanity. He has definitely left a mark on the world, and without Sumner, it just wouldn’t be the same.
With that said, I just wanted to point out that I still read his blog regularly and I’ve noticed what feels to me as a sort of tectonic shift in the ambiance of reason, and I occasionally wonder if it is still the same person writing the posts.
Take this post on Econlog about productivity, for example.
The sharp reduction in productivity growth since 2004 is one of the most notable recent trends in macroeconomics. Not surprisingly, some pundits have suggested that this slowdown is linked to the Great Recession…
To summarize, we don’t know why productivity growth is so low (I suspect it is related to the economy’s shift to services, as well as hard to measure stuff on the internet) but it is not caused by the Great Recession. Indeed you’d expect growth to be faster than after a deep slump. And indeed growth was faster than normal after the deep slumps of 1920-21, 1929-33, 1937-38, 1974-75, and 1981-82. This is the only deep slump (in America) followed by slower than normal growth.
In my view, it’s a waste of time trying to construct a business cycle model where a deep slump permanently reduces the economy’s growth rate. That’s because if you “succeed” in explaining 2008-09, then you immediately unexplain what we thought we new (sic) about the 5 earlier slumps mentioned above. Why would anyone wish to solve one problem at the cost of creating five brand new problems? Better to treat this recovery as an anomaly, and look for reasons why productivity growth began slowing after 2004.
I don’t believe productivity is the issue in any case. But I decided that before I embark on a counter argument it might be helpful to check the facts of the one presented. So I took a look at a productivity graph available on FRED. It doesn’t go back any farther than 1988, so it’s not particularly useful for validating the exact points made here. But it does show that there really wasn’t anything unusual in the behavior of productivity in 2004-2006 compared with the 1991 recession. After the 1991 recession, productivity goes on tear for about a year and then plummets. For the recession in 2001, I see the same pattern, though the productivity gain lasted longer, about two years, starting its decline in 2004 and didn’t plummet as far by 2006.
The Great Recession time period shows about the same pattern, only productivity plummets much farther than after the productivity gains following the 2001 recession. The behavior was comparative with the 1991 recession and there is no detectable anomaly there.
Not only is there no detectable productivity anomaly there, there doesn’t appear to be any THERE there.
Market monetarists for the most part don’t or at least haven’t explained the world in terms of productivity. That is not to say that isn’t possible, but the basic theory behind NGDP targeting offers far more compelling of a story about why growth is slow, and can be explained with the equation of exchange: MV=PY, because what happens on the left side of the equation ends up split between inflation and growth on the right. Thus considering that NGDP growth has slowed considerably since 2014, the GDP deflator has shown no signs of life, and the Fed is still just as heartily undershooting today as it was three years ago, 2.8% NGDP minus 1.2% inflation gets 1.6% growth.
There simply is no need to go reaching for other theories in this case. The real problem isn’t real, it’s nominal.