Should we include the financial sector? Here is Daniel Gross on this debate:
In principle, economists say, the figure that represents the
broadest possible swath of the economy is preferable. That would seem
to weigh in favor of the more pessimistic nonfarm business number. But
there may be good reasons for giving careful weight to the measure of
productivity that excludes the financial world. In some ways, it may be
After all, it’s much easier to calculate
productivity for companies that produce widgets than it is for
companies that produce less tangible goods like insurance policies.
While the productivity of a factory worker doesn’t vary radically from
month to month, the productivity of a hedge fund manager can swing
wildly from week to week.
What’s more, it strikes some
economists as strange that including the dynamic financial sector would
somehow make the economy seem less productive. "If you see productivity
being dragged down by the inclusion of the financial sector, you have
to be a little suspicious," said David Altig, vice president and
associate director for research at the Federal Reserve Bank of
Cleveland. (Mr. Altig speaks for himself, not for the Fed.)
Read Brad DeLong for commentary.
The bottom line: Productivity is doing better than we had thought. The second bottom line is that the first bottom line could be wrong and productivity might be doing worse than we had thought. The best guess, however, is that we are mismeasuring productivity in the financial sector. Keep in mind, the rate of productivity growth is the critical variable for whether we will survive the coming Medicare fiscal train wreck, without entering the realm of perpetual economic stagnation and draconian tax rates.