Friday, July 09, 2004

Productivity Mirage? Postrel Gets Nutty

Virginia Postrel is one of my least favorite economic writers. Her latest bout of hysteria passing for analysis is her touting the "productivity miracle". Brad Delong links to the story. Virginia's claim is that the productivity story is the big untold story of the past decade.

Her enthusiasm is unwarrented for several reasons. Brad Delong here presents a chart of average productivity trends over several decades. As a brief glance at the chart will show, productivity currently while better than the seventies and eighties, is not even as high as it was previous to that period. Second of all Virginia seems to imply that reporters aren't reporting on the story because it's boring.

1) The productivity story is boring. It isn't really, but editors think it is. There's no obvious conflict, no scandal, no little guy getting hurt (unless you portray rising productivity as throwing people out of work, which is the most common angle). The improvements that drive productivity increases are incremental--hence, not dramatic--and often technical.

That may be well true but there's a better reason not to write about it. First of all it may be an illusion. Second of all it may be happening for other reasons than conventional wisdom would have it. One reason for increased productivity in the late nineties that springs to my mind is the historically low cost of energy because of the crash in oil prices. In addition, the usual reason that is given for productivity increasing doesn't seem to hold for other regions where productivity should also be rising if that is the case. For instance Europe and Asia don't seem to have had corresponding productivity leaps to my knowledge because of technology alone. There is also the factor of bad accounting. Offshoring may lead to increased production being counted through affiliates but not their labor. Offshoring therefore may be inflating productivity figures.

In reality it's probably a combination of the above factors. The point is that no one really knows for sure why productivity as measured is rising. There the right response to when one does not know is to avoid making unsubstantiated claims. Since editors frown on writers that regurgitate figures without context, and no one knows, then discretion is the better part of valor in publishing "Gee whiz! Productivity is up but no one really knows why!" pieces that might end one's career if repeated too often. This is because doing so too much will result in one sounding vapid and silly. Rather like Virginia.

The person who has studied this most in depth to my knowledge is Nathan Newman. He has questioned whether GDP growth "is real" and links to the Prudent Bear article that asks if Hedonic indexing is overstating our productivity:
Perhaps as a frustrated response to this apparently misguided and destabilising migration of capital to the United States, a few European central banks are beginning to question the foundations of this so-called American growth and productivity miracle. Recently the Bundesbank has added its voice to this debate, indicating that the use of hedonic indexing has done much to add to the illusion of US economic strength (consequently, enticing US dollar flows and engendering corresponding weakness in the euro) and the relative weakness of German economic performance in comparison. The discrepancy stems in large part from the fact that the German central bank statisticians employ no hedonic adjustments to calculate improvements in productivity, according to the Bundesbank. By adopting such techniques, German investment would appear bigger and faster growing, argues the German central bank.

Now Britain has disclosed similar findings. According to the Office of National Statistics, although the computer industry makes up only 2 per cent of total output, if the US calculations were used in Britain, it would have a significant impact, raising total recorded industrial output by an additional 6 per cent over four years. And so begets another new economy miracle. By sheer coincidence, an election is thought to be a mere 6-12 months away now in the United Kingdom, so any “improvement” in the country’s economic performance will no doubt enhance the credentials of the New Labour government, as well as providing respectable economic cover for a grab bag of tax concessions in the upcoming budget statement by the Chancellor of the Exchequer.

Now these are not crackpots questioning the validity of US productivity growth. These are the central banks of Germany and the British office of national statistics. These are heavy hitters. They point out that the use of "quality" indexing is grossly distorting in the overall figures even if the component is small. As for a layperson's explanation of why such "quality adjustments" to pricing is madness, see the oldman's post here.

To emphasize this, the BEA itself has admitted that if it does the math properly all such gains (including the spike in GDP growth to eight percent last year) pretty much disappear. (via Nathan Newman)Finally, Nathan also links to The Economist and cites their article in arguing why trade, and specifically offshoring, has overstated GDP gains and therefore productivity along the way.

I'm following up these leads, but the story seems to be that the productivity gains are mostly a mirage. There are some real gains from technology but they're simply not that impressive. If technology really was the reason for so much improved productivity, you'd think that you'd see a proportional increase in industrial production which is heavily technology dependent. But we don't. Much of the gains seem to be from factors completely without virtue, such as oil prices being low in the late nineties, or accounting issues such as production versus hours worked in productivity reporting. Or statistical flukes from bad measures that government organizations are admitting simply don't work or grossly distort figures.

All of this is a better than good reason not to write about productivity. Unless of course you're nutty Postrel and about to run with a story when you have absolutely no idea what is going on!

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