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The U. S. Productivity Growth “Explosion”: Dimensions, Causes, Consequences, Aftermath

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## The U. S. Productivity Growth “Explosion”: Dimensions, Causes, Consequences, Aftermath

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**The U. S. Productivity Growth “Explosion”:Dimensions,**Causes, Consequences, Aftermath Robert J. Gordon, Northwestern University and NBER, NABE 48th Annual Meeting, NBER Session, Copley Place Marriott, Boston, September 11, 2006**Brief Survey of NBERResearch on Macro Productivity Issues**• Research Papers on my web site, google “Robert J. Gordon” • Topic #1 on quarterly productivity behavior, today’s unpublished update of BPEA 2003 • Topic #2 on inflation, unpublished update of BPEA 2005 with added dire implications for Bernanke • Topic #3 on Europe, new paper on web site (unfortunately no time to talk about this)**Broad-rangingInterpretation of U. S. 2002-04 Productivity**“Explosion” • #1. Causes, Were they Temporary, Dimensions of Future Slowdown • #2. Effects of Productivity Growth on Core Inflation and the Fed’s Dilemma • For this NABE Audience the quarterly analysis of U. S. data will be emphasized • Lots of charts, new analysis here done since early August BEA and BLS data releases**Topic #1: Behavior of Productivity Growth in Quarterly Data**• Important to understand the dynamics • They have nothing to do with the NBER business cycle chronology • The behavior of productivity is driven by the lag of hours behind output • This was a topic of the early 1960s, Okun’s Law and Walter Oi on labor as a “quasi-fixed factor”**Key Implications of Lagin Hours Behind Output**• Productivity Growth is not Synchronized with the utilization of resources • Because hours lags, productivity leads • Productivity Growth is fastest at the beginning of the recovery • The “early recovery productivity bubble”**Trend Methodology**• Two Leading Methods of Detrending • Hodrick-Prescott Filter • Normal Paramater of 1600 bends too much and allows too much of the “cycle” to get into the trend. • Everything here uses HP 6400 • Kalman Filter. Allows correcting for changes in the business cycle**Alternative U. S. NFPB Productivity Trends in Quarterly**Data, 1954-2006**The Early Recovery Bubble,How Much “Payback” is Left?**• 2001:3-2004:2, 11 quarter AAGR • Actual 3.87 • Trend 2.92 • Difference 0.95, or cumulatively 2.62 • 2004:2-2006:2, 8 quarter average • Actual 2.00 • Trend 2.68 • Difference -0.68, or cumulatively -1.37**What Implications for2006:Q2-2008:Q2?**• Start by Assuming that the trend slows a bit further from 2.68 to 2.50 • Remaining “payback” of 2.62 (01-04) minus 1.37 (04-06) equals 1.25 • Distributing that over next two years implies actual AAGR = 1.88 • Anything below that would imply the trend is lower than 2.50**The “Output Identity” Organizational Tool forTrends,**Cycles, and Residuals • In its Simplest Form Makes Output (Q) Equal to the product of: • Productivity (Q/A) • Hours per Employee (A/E) • Employment Rate (E/L), that’s just (1 – U/L) • Labor-force Participation Rate (L/N) • Working-age Population (N) • Hiding Inside the Output Identity are Numerous Useful Trend and Cyclical Relationships, including OKUN’s Law.**Five-term Output Identity Cannot be Used for Empirical**Analysis • Productivity data for the NFPB sector • Expand the identity to identify NFPB variables and links to total economy: • Mix effect – ratio of output per employee: total/NFPB sector • Employment ratio of payroll to household**The Novelty hereis to Display the Seven Components**• We’ll look through each of them, plotting actuals (8-qtr MAs) vs. trends • We’ll pay special attention to what has happened to each over the past six years • Then we’ll multiply them together to see what has happened to potential real GDP growth**Potential GDP vs. Productivity: the Trend Story in Table 2**• Potential GDP growth (Δq*) ranged from: • 4.03 in 1963-72 to 2.69 in 1987-94 • Differences accounted for by • Productivity (peak 1954-63) • Population growth (peak 1972-78) • LFPR (peak 1972-78) • Offset by hours/employee (peak 1963-72) • Currently growth rate is 2.9 percent by one measure and 3.0 percent by the other**Okun’s Law Updated: What Happens with Changes in Ratio**of Actual to Potential? • When the ratio of actual to potential real GDP rises by 1 percent, the following happens (after allowing for lags) • The unemployment rate falls by 0.50 • Productivity growth rises by 0.16 • Hours per employee rise by 0.10 • LFPR rises by 0.10 • Residual distributed across other factors**Why Did Productivity Growth Accelerate Further, 2002-04?**• Hypotheses in 2003 BPEA paper • Savage corporate cost cutting (profits hardly fell in 1990-91 but fell by half in 2000-02) • Intangible capital • Implications of Industry Decomposition • Jorgenson and Stiroh: IT no role after 2000 • Sichel’s new numbers show IT no more important in 2000-04 than in pre-1995 • Added Element from Jorgenson-Stiroh, forthcoming slowdown in “labor quality”**Implications for Interpretation**• What does it mean that no special role of IT use in 00-04 or 01-05 acceleration? • Stiroh’s interpretation: a broad cross-the-board upsurge in TFP growth unrelated to IT investment • My 2003 BPEA interpretation, unusual pressure for corporate cost-cutting due to late 1990s bubble, overshooting, accounting scandals • Stiroh: It’s permanent, but we don’t know why • Me: Big but temporary adjustment in corporate organization and cost structure. Trend is headed from 2.6 now to 2.25. • Potential GDP headed from 2.9 to 2.6**Effects of Productivity Growth on Inflation**• Details of the inflation model and its treatment of productivity are in BPEA 2005, no. 2 (and on my web site) • “Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income” • The 2005 BPEA paper was co-authored with Ian Dew-Becker**“Triangle” Model of Inflation**• Developed in late 1970s, intact since 1980 • Two sides of the triangle are demand and supply • The base of the triangle is inertia**How it Works: ExplainsHeadline PCE Deflator**• Demand enters through the unemployment gap (TV-NAIRU) • Supply shocks (changes relative to zero) • Food-energy effect • Relative price of imports • Change in trend productivity growth • Inertia: allow 24 quarters to enter**How the Model has Changed since 1980**• Before 1995, assumed the NAIRU was fixed at 6.0 percent • Actuals fell below predictions in 1994-95 • Adopted Stock-Watson technique of estimating a NAIRU that varied over time • The technique simultaneously estimates the inflation equation coefficients and the TV-NAIRU**The Model Also Produces**• Post-Sample Dynamic Simulations • Have Coefficients Changed? • Instead of 1962-2006, estimate only for 1962-1996 • Lagged inertia effect for 1996-2006 then generated endogenously • This is the key technique to reveal changes in coefficients, or “drift”**Here are the Three Supply Shocks**• Food and Energy Effect • This is simply headline PCE inflation minus core PCE inflation • Change in relative price of imports • Change in productivity trend growth, from the research summarized earlier • A Consistent Theme: Greenspan’s Gifts!**With a “Neutral” Set of SS, What is Need to Maintain**2.0% “Comfort Zone”?**Conclusion about Bernanke’s Dilemma**• Due to long inertia lags, nobody has noticed • Oil prices really do get into core inflation • So do rising relative import prices if/when dollar falls • So does the productivity turnaround • Bernanke is now stuck with ~3.0 not 2.0 core inflation**There are only Two Choices**• The first choice is to create a recession with several years of unemployment above 6 percent • The second choice is to abandon any pretense of a 2.0 (or even 2.5) core inflation target • NYT Jackson Hole coverage suggested the second option has already been chosen but they won’t say so (of course)**No Time for Topic #3,Europe’s Turnaround**• I’ll just leave you with two enticing graphs • The details are on my web site, look for the paper about “Tigers and Tortoises” (also co-authored with Ian Dew-Becker). • Post-1995 reversal in EU-US productivity growth • Post-1995 reversal in EU-US hours growth