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Dean Baker On Economists’ Contradictions On Productivity

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Dean Baker has been writing some of the best articles about the U.S. economy in the past few weeks. I have already linked to his articles on this blog. If you have missed them, follow the tag with his name at the end of this post.

His analysis has been about economists’ incorrect narrative about productivity and U.S. trade. This narrative simply is that workers are losing jobs because of automation and not because of U.S. trade and globalization. Dean Baker shows that it’s quite the opposite.

In his latest post, he points out the inconsistency of economists stands. One on the one hand, economists seem to be saying that productivity rises will be large because of automation and on the other hand saying that productivity won’t rise much.

This is the stand of Paul Krugman whom Baker cites. In his column On Economic Arrogance for The New York Times, Krugman argues that it’s impossible for the U.S. to grow at 3-3.5% in the next decade. Krugman says:

The only way we could have a growth miracle now would be a huge takeoff in productivity — output per worker-hour. This could, of course, happen: maybe driverless flying cars will arrive en masse. But it’s hardly something one should assume for a baseline projection.

Now, it’s quite possible that Donald Trump, being the erratic person he is, can mess thinks up. You can’t be sure what he is up to. He may come up with a large fiscal expansion or not. But the more important question is about the possibility. Would Hillary Clinton or Bernie Sanders been able to achieve the growth rate of 3-3.5% had they been the President? According to Krugman it’s simply unlikely because he thinks productivity growth will be low.

The same kind of argument was given by Krugman when Bernie Sanders released his economic plan. See John Cassidy’s article Bernie Sanders And The Case For A New Economic Stimulus Package in The New Yorker from for a good analysis, written February 2016. In the article Cassidy reminds us of the Kaldor-Verdoorn Law according to which faster GDP growth leads to faster productivity rises.

To break out of this low-growth trap, the economy needs policies designed to boost demand and push it onto a higher growth path: one in which rising investment, higher levels of productivity, rising rates of participation in the labor force, and higher wages all reinforce each other. With these conditions in place, companies would have more of an incentive to make capital investments, and as the price of labor rises they would also have an incentive to innovate and move up the value chain. Realistically, we can’t expect 5.3-per-cent G.D.P. growth and 3.3-per-cent productivity growth to persist for a decade. But we don’t necessarily have to settle for the 2.1-per-cent G.D.P. growth we’ve become accustomed to, or even the 2.3-per-cent rate that the Council of Economic Advisers has identified as its long-term potential. The U.S. economy has the resources and the ingenuity to do better than that.

As [Gerald] Friedman points out, the idea that faster G.D.P. growth generates higher productivity growth (and higher wages) has historical support. Back when I was an undergraduate, it was associated with Nicholas Kaldor, the British Keynesian, and with P. J. Verdoorn, a Dutch economist. (In a footnote, Friedman cites both of them.) More recently, in the late nineteen-nineties we saw rapid rates of G.D.P. growth and productivity growth appear in tandem. Some analysts would claim that the latter generated the former, rather than vice versa, but that argument isn’t convincing. In a Kaldorian virtuous cycle, G.D.P. growth spurs productivity growth, which, in turn, spurs G.D.P. growth. Causation goes both ways.

So the U.S. economy has a lot of scope for growth in the next decade. There are ways:

  • The U.S. GDP can grow without productivity rising simply because there’s huge unemployment. The U-6 unemployment rate is currently 10.1%. Because of Okun’s law which says that a growth of 1.65% will reduce unemployment by 1% (see estimation of this parameter for the U.S. by Matias Vernengo here.)
  • Rise in the workforce. Over time, work force also rises, (depending on demographics), this adds to the capacity of the economy. A notable thing during the crisis is the fall in the workforce in the U.S. Am not sure about details around this. Seems this is not captured in U-6. One would have expected the labour force to have not dropped and unemployed being captured in U-6. In other words, it’s possible that there’s more potential labour available.
  • As above, because of Kaldor-Verdoorn law, higher production leads to higher productivity. The Verdoon coefficient is 0.63 as per the paper cited above. So a growth of 1% will lead to a rise in productivity by 0.65%. Higher productivity implies that it takes less labour to produce the same amount of things. This in turn implies that the labour can be employed elsewhere or to produce more of the same stuff. So rise in productivity increases production capacity.

So these three points are enough to prevent the U.S. economy from hitting full capacity for a long time. Scarcity is a thought which needs to go from economics.

At any rate, the main purpose of this post was to point out the contradictory things economists say. Economists seem to be saying that automation will rise, which translates to rise in productivity. At the same time they are also saying that productivity will be low. Further Dean Baker has also pointed out how the Federal Reserve is on the path to raise interest rates. If they are worried about automation killing jobs, why aren’t they worried about the Federal Reserve’s rate hikes destroying jobs?

Link

Dean Baker — The Trouble With International Trade: People Understand It

Dean Baker:

[these days,] major news outlets have been filled with misleading and dishonest stories claiming that the real cause of manufacturing job loss has been automation and that people are stupid to worry about trade.

…

From December of 1970 to December of 2000 we lost 130,000 manufacturing jobs, less than one percent of the total. There was plenty of productivity growth in manufacturing over these three decades. While manufacturing employment did fall as a share of total employment, there was little change in the absolute number of manufacturing jobs over this long period.

By contrast, manufacturing employment dropped by more than 3.4 million, or more than 20 percent, in the seven years from 2000 to 2007. This was trade. The trade deficit exploded over this period to almost 6 percent of GDP, which would be more than $1.1 trillion in today’s economy.

[the title is the link]

Dean Baker On Automation

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In his farewell address, Barack Obama toed the New Consensus’ line (around 12:50 in the video in the link):

… But, for all the real progress that we’ve made, we know it’s not enough. Our economy doesn’t work as well or grow as fast when a few prosper at the expense of a growing middle class, and ladders for folks who want to get into the middle class.

That’s the economic argument. But stark inequality is also corrosive to our democratic idea. While the top 1 percent has amassed a bigger share of wealth and income, too many of our families in inner cities and in rural counties have been left behind.

The laid off factory worker, the waitress or health care worker who’s just barely getting by and struggling to pay the bills. Convinced that the game is fixed against them. That their government only serves the interest of the powerful. That’s a recipe for more cynicism and polarization in our politics.

Now there’re no quick fixes to this long-term trend. I agree, our trade should be fair and not just free. But the next wave of economic dislocations won’t come from overseas. It will come from the relentless pace of automation that makes a lot of good middle class jobs obsolete.

In other words, Obama says that international trade and globalizing production aren’t responsible for weak employment and labour markets, but it’s automation.

Dean Baker has been writing a series of good articles puncturing these arguments. In his latest, titled Badly Confused Economics: The Debate on Automation, he writes that productivity hasn’t been rising much and that if tightness of the labour market is cited as one of the reasons for hikes in interest rates by the Federal Reserve, that’s contradictory. Baker says:

… The other reason why the concern over automation seems misplaced is that it is directly at odds with how we talk about other areas of economy policy. To take an example that has recently been in the news, the Federal Reserve Board raised interest rates in the United States last month. It is widely expected to raise interest rates several more times in 2017.

The reason for raising interest rates is that the Fed is concerned that the economy is creating too many jobs. This will increase workers’ bargaining power, putting upward pressure on wages. A more rapid rate of wage increases will lead to more rapid inflation. To prevent this outcome, the Fed wants the economy to have fewer jobs.

But how can it make sense that, at a time when we are worried that automation is destroying a massive number of jobs, we also need the Federal Reserve Board to add to the job destruction by raising interest rates? If automation is leading to mass job destruction the Fed should not have to be worried about overly tight labor markets.

Dean Baker On US Manufacturing And International Trade

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The U.S. manufacturing deficit was $831 billion in 2015. The 2016 number might be out in a few days. Dean Baker has an excellent article, Painful Nonsense on Trade on his blog in which he debunks the claims of most economists that the US trade imbalance didn’t lead to job losses. He says:

… Note that the level of manufacturing employment, while it has cyclical ups and downs, is nearly constant from 1970 to 2000 at around 17 million. It plunged in the early years of the last decade as the trade deficit exploded. Most of the fall in employment was before the collapse of the housing bubble in 2008. This is what happens when a trade deficit increases from around 1.5 percent of GDP, the mid-1990s level, to almost 6.0 percent of GDP at its peak in 2005–2006 (over $1.1 trillion in today’s economy).

and also that the comparison to Germany is misleading:

DeLong also does a bit of sleight of hand in telling us that the loss of manufacturing employment is the same everywhere, pointing out that even Germany, the big success story, saw employment in manufacturing fall from about 40 percent of the labor force in 1971 to 20 percent at present. This is true, and if the United States had the same share of its workforce employed in manufacturing as Germany, we would have another 15 million manufacturing jobs.

A similar point was made by Wynne Godley in 1995! In A Critical Imbalance In U.S. Trade, The U.S. Balance Of Payments, International Indebtedness, And Economic Policy he said:

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.