Friday, March 7, 2008

Slowing productivity growth: the AS curve again

This is, admittedly, "old stuff" (a month old when the numbers came out), but I just came across it, bouncing around the blogosphere. And if it truly measures the trend it claims to be measuring, then a month does not make much a difference.



The ultimate source is Robert Gordon, the Northwestern University productivity econ head, but I got it from Michael Mandel's "Economics Unbound", in turn via Mark Thoma's "Economist's View", where I stumbled back after a while after reading something in Megan McArdle's "Asymmetrical Information". (I told you I was bouncing around... sometimes my guilt-prone self makes me think I'm single-handedly responsible for the drop in productivity shown above. Oh, well.)


Slowing productivity slows down the expansion of the aggregate supply curve which, given an aggregate demand now expanding faster in relative terms, leads to price increases and slower GDP growth.


This is just the kind of evidence I was looking for in my earlier post (and, to a lesser degree, this one). The message remains the same: if what lies behind slowing growth (and rising prices) is a slowdown of the AS curve because of slower productivity growth and higher input prices (including credit), then policies aimed at expanding the aggregate demand will soon be fueling inflationary expectations while at best providing temporary GDP-growth relieve.


And if that happens, we will end up with resilient inflation slowing down growth in the longer term and a Fed in need of recessing the economy to lower those pesky expectations.

2 comments:

Gabriel Mihalache said...

I want to believe.

But this might be caused by a drop in capacity utilization, paired with some sort of labor hoarding behavior.

ram said...

Gabriel,

Thanks for your comment. Sorry I've taken this long to reply: I really need to get better at this.

You make an interesting point, but I have to disagree: the downward trend began in what looks like 2002 (if we can believe the graph: I have to admit to not knowing the methodology behind it). This period (02-08) covers a subset of years of strong output growth and would anyway seem too long to justify explaining a downward trend in productivity growth through a drop in capacity utilization. Also, I'm not sure about what you mean by "labor hoarding" in this context.

Before seeing this graph, I had suggested elsewhere that rising factor prices lent credence to the "slowing down of the expansion of the AS curve" argument. In my view, what this graph does is strengthen the case that it's not only the short run AS curve that's slowing down, but both the short AND long run curves. In this pessimistic scenario, we've been growing above trend for a while already and expansionary policies to restore that old rate will be even more inflationary than expected.