Was recent productivity growth an illusion?

by on March 3, 2009 at 5:59 am in Economics | Permalink

Here are some slides from Michael Mandel, he says yes it was an illusion.  Matt Yglesias has a good summary of his argument.  Median wages were stagnant, the stock market was down, and health care costs were rising, without necessarily translating into better outcomes.  Mandel argues that the current collapse in part stems from the revelation that productivity growth (and no, he doesn't trust the reported numbers) was low all those years.  On top of all that perhaps productivity growth in finance was overstated as well.

My take is this: there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus.  Maybe you will live until 83 rather than 81.5 and your pain reliever will work better.  In the meantime you will read blogs and gaze upon beautiful people using your Facebook account.  Those are gains to consumer surplus, but they don't prop until the revenue-generating sectors of the economy as one might have expected.  Given that, the rest of Mandel's argument can still work, whether or not you think the productivity gains were a mirage in some absolute sense.

1 run March 3, 2009 at 8:28 am

So there’s been this puzzle: if there’s so much more productivity, how come the price of labor hasn’t been bid up?

Now we know the answer: the productivity gains were modest and they were eaten by healthcare.

(Notice that this undermines the standard left-wing story of the greedy capitalists won’t share and vindicates the standard right-wing story of our official statistics are shit

2 Obloodyhell March 3, 2009 at 8:58 am

> and they were eaten by healthcare.

And gov’t bureaucratic paperwork. Never forget that eternal gift of government.

3 Phil P March 3, 2009 at 9:24 am

“…perhaps productivity growth in finance was overstated as well”.

You think?

Considering that at the height of the business cycle 40% of measured corporate profits came from the financial industry, much of which in retrospect was clearly fictitious, that our banking system as a whole is now widely considered to be insolvent, it is evident that a large part of the financial system was a vast value-destroying enterprise.

4 Christopher M March 3, 2009 at 10:53 am

So, uh, what if we really are reaching the end of the century-ish-long period of apparently ceaseless productivity growth through technology and rationalization? What will that mean?

5 Allen Varney March 3, 2009 at 11:57 am

“there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus.” So this “productivity” was, um, what, increased generation of pixie-dust? Polishing of rainbows and grooming of unicorns? Just general overall good-feeling-ness for everybody?

If we’re resorting to terms like “gains to consumer surplus,” sounds like we need a new definition of “productivity” — or perhaps “reality.”

6 Dave March 3, 2009 at 12:52 pm

It’s common knowledge that real incomes are difficult to estimate because they rely on a basket that doesn’t change over time, but the kinds of things people want and the quality changes constantly. I wonder if, as the economy grows and technology improves, the types of goods automatically diversify, making it increasingly hard to run those estimates. So I don’t trust any of them.

It seems that the housing bubble + land use restrictions caused a lot of price increase for most people, and I don’t see how to factor things like that in a simple way. But clearly it was very damaging to the real income of young workers, perhaps even enough to nullify technological advancements. It’s also commonly said that US medical expenditures are about 50% waste. That’s not for certain but it could be another big problem.

But if so, that makes policymakers jobs “easy”: crush the housing bubble and create a subsidized research board that evaluates the cost and benefit of all medical procedures and publishes them for the benefit of consumers and payers. I think Obama even actually supports the second one. Land use restrictions will be hard to kill, though, I think. They feed quite naturally into people’s worst instincts and strongly held traditional beliefs.

7 Byrk March 3, 2009 at 2:30 pm

The new ‘War on the Wealthy’ promises higher taxes for investment, for income, for health care, and for non-profits

Even Reagan raised taxes, did he conduct a “War on the Wealthy” as well? This is standard Republican fare, wer taxes on the rich. Watch massive deficits grow. If anybody suggests raising taxes, declare that raising taxes back to previous level would destroy the economy. Willfully ignore that the economy performed just fine at those tax levels before.

8 Superheater March 3, 2009 at 5:01 pm

The War on the Wealthy will result in less innovation during the next decade. Good bye to Michael’s rosy future. Hello increased poverty, stagnation, and conflict.

Adam, I think you’ve nailed it. The political class (has anybody noticed how money politicians FROM BOTH PARTIES) will prosper, no matter what. Its sort of like Hillary Clinton’s famous cattle futures trades-they seem to be long and short on everything and able to benefit as long as they can introduce some disruption into the system.

9 Former MA Auditor March 3, 2009 at 5:52 pm

“And gov’t bureaucratic paperwork. Never forget that eternal gift of government.

That’s what I love about private insurance companies operating in the free market. There’s no bureaucracy, no paperwork, no administrative costs. It’s a real testament to the power and strength of ideology and words — these things just disappear from plain sight.”

Let me give you an example of government “paperwork” as it applies to medicine. Specifically, this is drawn from my experience as an MA/MC auditor in “a large eastern state” with significant but concentrated MA eligible populations.

Several years ago, this state decided to push its MA eligibles to (now read closely, here comes Orwell) MANDATORY managed care. The program was (is?)labeled as blank_CHOICES. (In government, being assigned something is a choice).

The preferred reimbursement mechanism was to be capitation or payment of a fixed fee per person per month eligible to the provider organization -usually an MCO or managed care organization, the name “HMO’s” like to called (remember HMO’s? a creation of the left, specifically Ted Kennedy) after “HMO” became synonymous with paperwork, restriction, delay, denial and annoyance.

Of course, some “eligibles” automatically present higher exposure to the contracting provider, such as those with chronic diseases (HIV/AIDS or Hemophilia, for example). In addition the other big issue in the MA population is maternity care. Yes, its true-MA eligibles DO have ’em earlier and oftener, if my claim samples were anywhere near random. Lots of 15 year old “mothers” and 40 year olds aborting that had 6 kids. My favorite clinical note: “the client indicated she would become pregnant again by next year, as she is sure that she can handle high school and a baby at the same time”. It was always fun to read the atttending social worker notes, so blase’, so nonjudgmental…

My particular area of concern was the latter, maternity care. After reviewing countless pages of documents, including contracts, federal laws and regs, and a 150 page “request for proposal”, we determined that payment was to be made to the provider for any live or non-live outcome, as long as the non-live outcome was a pregnancy beyond the first trimester and its termination wasn’t due to induced abortion.

The governmental theory to paying for non-live outcomes is that if they can “encourage” all of these young women to get proper prenatal care-we can avoid a myriad of post-natal expenses, ranging from addiction syndromes to behavioral issues correlated with poor prenatal nutrition.

The problem was in all that documentation, NOBODY EVER DEFINED first trimester. The reason is simple. When you have a spontaneous abortion (miscarriage) the physician isn’t collecting fetal tissue in hopes of weighing it, measuring it or estimating the age of the fetus.

And in spite of all the inducements to get the MA eligibles to be aware of their fertility, obtain FREE, FREE prenatal care and usually other enhancements to public assistance-most don’t. So instead of having a nice record of OB./GYN visits with a “dead rabbit” to establish a record that would have a positive pregnancy test or physician estiimated date of conception, you have nothing.

Result? 68% of the billable non-live outcomes were rejected due to inadequate supporting documentation.

This is such an improvement from the days when a DAD wrote a CHECK to the doctor, no welfare bureacrats, insurers, actuaries or auditors necessary.

10 kebko March 3, 2009 at 7:43 pm

Yes, we’re in the midst of the anarchic rise of the internet, we’re within a decade of mapping the human genome, we have biotech & nano tech, plant & animal husbandry are quaint relics. But I have some graphs that are flat, and some numbers that are stable, so clearly we are in a no-growth funk?!

Really, now. Does a single one of us spend even a day living in a way that would have been remotely possible 30 years ago? For example, this very discussion, between people from around the globe, moderated by a highly regarded economist, while sitting in our respective living rooms?!

We are in the midst of a revolution. This is like being alive when the printing press was invented & saying, “Big deal. Harvests were a little low in the southlands this year. Fat lot of good all those books are doing to help the harvest this year.”

It’s the numbers & graphs that need fixing.

11 Elvin March 4, 2009 at 12:27 am

I am amazed at recent productivity growth. My Blackberry helps me to manage my professional life from practically anywhere. My Ipod carries thousands of songs–an impossible feat 10 years ago. I haven’t bought a road map at a gas station in years because of my GPS. My new furnance definately helps to lower my heating costs. My wife raves about her new washer and dryer. I have an elliptical machine in my basement, so now I don’t have to go to the gym as often to stay in shape. My kids text me on where to meet me at the mall.

How did we live without all this? I can’t imagine going back.

12 Barbar March 4, 2009 at 2:16 am

I’m pretty excited about the internet and related technologies. I think we’ve really reached a new era in economic history, and I fully expect the stock market to go through the roof and head for the moon — my prediction is that the Dow hits 36,000 within a few years. Some people think that that’s totally unrealistic, but they don’t appreciate how much technology will change the paradigm. It’s a new world.

(Sorry, in a funny mood tonight.)

13 Sullivan & Cromwell March 4, 2009 at 12:01 pm

“In the meantime you will read blogs and gaze upon beautiful people using your Facebook account.”


Don’t you mean that in the meantime you’ll be masturbating furiously to pictures of your step daughter’s friends on Facebook?

14 Mick March 4, 2009 at 6:00 pm

I continue to be impressed by the tremendous growth in academic productivity, totally justifying outrages growth in the cost of education.

15 Nathan March 5, 2009 at 12:43 pm

I’ve read some writers (I can’t quite remember where) who have claimed that there has been a shift in certain parts of Silicon Valley over the last few years – more and more web and software startups have grown more gunshy about accepting VC. Partially it’s because the default VC strategy has been to grow a company furiously and then flip it as soon as possible, but the main reason is that a lot of these guys actually want to make what they’re working on, on their own terms, and they’ve figured out that the capital requirements are so low to do interesting stuff at this point that it’s just far easier for them to live really cheaply while they work. As one of the writers put it, capital has invested in all these computer leverage and infrastructure projects to get more and more done with fewer and fewer prima donna tech people, and suddenly they’ve discovered that, with all those tools in place, capital and its control has just become the biggest thing to optimize away in the quest for making good things.

What if, in this big “frictionless” market that is the internet, we discover that for many, many people, money itself (and contract law, and propety rights) are the biggest intolerable frictions to people getting and achieving what they want, and so they’re quite willing to discard them? This is something I’ve been puzzling over for a while – I look at those charts about stagnant growth, and then I think about how WILDLY more wealthy I feel right now (entirely through the growth of non-rivalrous information-based goods online) than a decade ago, and the disconnect between the two seems really vexing.

16 DanB March 5, 2009 at 11:10 pm

Barkley Rosser, in the comments above, gives credit to the blogosphere for the “collapse of daily newspapers;” funny, I thought they were dying because they were all purchased by over-leveraged media conglomerates who thought that, by using technology and financial innovations, they’d be able to force productivity gains previously unseen in the business, and would be able to leverage their ownership of a valuable medium into new levels of profits in the digital age.

Instead, newspapers continued to generate the same profit margins they always have…which broke the conglomerate’s financial models. Bankruptcy was the obvious result.

If we now find that the productivity gains from tech and finance were largely illusory, then the story arc here makes sense.

And the idea that productivity was an illusion has the benefit of feeling true at a gut level. I recall reading (a year or so ago) some criticisms of how productivity was being measured. If you could buy a 32″ 720p LCD TV for $1000 two years ago, and today you can buy a 46″ 720p LCD TV for $1000…has there really been a 1 – 46/32 = 43% productivity gain? What more can you do with the newer TV that you couldn’t do with the older one?

And as silly as this example sounds, it’s pretty damn close to how productivity gains were measured for technology.

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