How much productivity growth was there during 2007-2009?

Michael Mandel has a long and excellent blog post on this question.  He claims that the supposed productivity gains were concentrated in a small number of sectors (one of which, by the way, was financial services ha-ha) and that they are mostly illusory when cross-checked with other sources of data.  Here is his final conclusion:

However, the effect of the adjustment on the 2007-2009 period is spectacular.  Productivity growth, which had been 1.6% annually in the original data, basically disappears. The decline in real GDP is twice as large  (-1.3% per year in the original data, -2.9% in the adjusted data).  And economists are no longer presented with the confounding puzzle of why unemployment rose so much with such a modest decrease in GDP–it’s because the decrease in GDP was not so modest.  (see a piece here on Okun’s Law, which links GDP changes with unemployment changes).

His redone figures, by the way, are based on the assumption that intermediate inputs are growing and shrinking roughly at the rate of final product (Mandel believes we are mismeasuring these intermediate inputs and thus finding illusory productivity gains over that period.)  Think of his alternative numbers as illustrative rather than necessarily his best estimate.  The implications of his analysis include:

1. Productivity statistics aren’t well set up to cover outsourcing.

2. Beware of measured productivity gains, reaped over short periods of time, based on supposed drastic declines in intermediate inputs.  We’re probably mismeasuring those inputs.  Mike’s examples on these points are pretty convincing, walk through what he does for instance take a look at his numbers on mining: “Mining, for example, combines a 10% drop in real gross output with an apparent 46% drop in real intermediate inputs,  leading to a reported 23% gain in real value-added and a 26% gain in productivity.  It’s very hard to understand how intermediate inputs decline four times as fast as output!”

3. During the crisis, output fell more than we thought and thus our recovery isn’t going as well as we think.  (By the way, this is the most effective critique of the ZMP hypothesis, since the implied decline in true output now comes much closer to matching the measured decline of employment.)

4. Issues of “international competitiveness” are much more important than either economists or the Obama administration have been thinking.  Excerpt:

…the mismeasurement problem obscures the growing globalization of the  U.S. economy, which may in fact be the key trend over the past ten years. Policymakers look at strong productivity growth, and think they are seeing a positive indicator about the domestic economy.  In fact, the mismeasurement problem means that the reported strong productivity growth includes some combination of domestic productivity growth, productivity growth at foreign suppliers, and productivity growth ”in the supply chain’.  That is, if U.S. companies were able to intensify the efficiency of their offshoring during the crisis,  that would show up as a gain in domestic productivity.

5. Read #4 directly above, think about who captures those gains, and you can see that the Mandel productivity hypothesis is broadly consistent with some of the data on income inequality.

6. There really is a structural unemployment problem and it stems from ongoing low productivity growth.

7. At the risk of sounding self-congratulatory, if you combine Mike’s estimates with the new Spence paper, and the reestimation for male median wages (down 28 percent since 1969), in my view the TGS thesis is looking stronger than it did even two months ago when the book was published.


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