The Food is Poison and the Portions are Too Small II: Krugman and Productivity Growth

Paul Krugman had an interesting column today calling attention to the rise in the profit share of income. The point is that we seem to be seeing rapid improvements in productivity growth (he cites the progress in the development of robots) that are drastically reducing the demand for labor. Yet all the gains from these improvements seem to be going to owners of capital as the labor share of output has been falling sharply.

The distributional issue raised by Krugman is extremely important, both for workers who are not seeing gains in living standards, and also for the economy as a whole, since a continual upward redistribution of income will lead to stagnation as a result of inadequate demand. However, it is worth noting that the concern that rapid productivity growth will lead to less demand for labor is 180 degrees at odds with the often repeated concern that productivity growth will be inadequate to sustain rising living standards in the future.

Even Krugman raised the latter concern when discussing a new paper by Robert Gordon suggesting that productivity growth was coming to a halt. However it features much more prominently in the whining over demographics that are a constant feature of national policy debates.

This is one where a baseball bat might be necessary. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs. Let's try that again. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs.

It is possible for too much productivity growth to be a problem, if the gains are not broadly shared. It is also possible for too little productivity growth to be a problem as a growing population of retirees imposes increasing demands on the economy. But, it is not possible for both to simultaneously be problems. (For fans of arithmetic, I just did the numbers on this. It is highly unlikely that lack of productivity growth will be a problem since even very weak rates of growth will swamp the impact of demographics.)

The Decline of Labor =Capital Concentration = Lower Demand = Higher Unemployment
written by Robert Salzberg, December 10, 2012 5:48

My hourly worker friend who had to be at Macy's at 10:30pm on Thanksgiving for a shift that lasted straight through the night to 8:30 am was paid neither holiday pay, overtime pay nor a shift differential. Merry Christmas.

People fought and died for the rights to overtime pay, vacations, a 40 hour work week, retirement and health benefits but those rights and protections have been steadily eroded in America ever since President Reagan busted the air traffic controllers strike in 1981.

Productivity gains closely matched wage gains from WWII untill around 1981 when they separated and wages for ordinary Americans have stagnated ever since. The decline of labor rights is the single biggest factor.

It's hard to imagine that labor unions will fix this imbalance.

The federal government is the only player left standing with the power to help.

Congress could raise the minimum wage to $10 and hour and index it to inflation, pass a financial transactions tax that should be used to fund a national and state infrastructure banks, institute some form of single payer health care, pass paid maternity leave, pass paid family medical leave, break the monopoly practices of the credit card, telecommunications, banking, energy and pharmaceutical industries....

Not this Congress and probably not the one being sworn in next month, but recognizing the problem is the first step towards the solution.

Lack of Demand is a Problem and is due to Wage Stagnation
written by Robert Salzberg, December 10, 2012 6:01

Dr. Krugman's piece links to an article about the rebirth of monopolies that misses on one key point:

"The problem of weak job creation certainly can’t be due to increased business taxes and regulation, since both were slashed during the Bush years. Nor can the explanation be insufficient consumer demand; throughout most of the last decade, consumers and the federal government engaged in a consumption binge of world-historical proportions."

While BTP regulars know that consumers continue to spend historically high percentages of their income, the real problem is income stagnation.

If American workers shared in the productivity growth over the past few decades the same way they did in the few decades after WWII when Labor and Capital were cooperating, we would have neither a debt problem nor an unemployment problem.

http://www.washingtonmonthly.com/features/2010/1003.lynn-longman.html

Speaking of a "Dark Age of Macroeconomics"...
written by LSTB, December 10, 2012 7:12

In his blog, Krugman unfortunately dismissed the Smith/Ricardo/Mill/Henry George/etc. argument that land values are a function of population and productivity and not individual endeavor, so therefore they should be taxed to ensure widespread prosperity. He opts instead for an "almost Marxist sort of discussion" of technological unemployment and monopoly power without acknowledging that land ownership is largely a zero-sum monopoly power.

It's easier to see distributional conflicts between labor and capital than it is to see underused urban land.

Otherwise, this is a really good BTP post because it connects Krugman's piece to others claiming productivity is too slow.

Carbon taxes force factories to close. Unemployment results. Califormia liberals are saddened, surprised. Those who bother to notice.
written by Rachel, December 10, 2012 7:25

What happens when the cost of inputs goes up too rapidly? (Because of government policy. Because of the taxes.) The less productive factories close. People are put out of work. Life gets much harder. And robot-intensive factories experience a surge in demand.

Paul Krugman notices just a part of the story. Most well-meaning people in California notice even less.

-1

productivity growth and employment
written by jennifer reft, December 10, 2012 7:32

I completely understand your point that there is not going to be a problem with support for retirees benefits; however I am concerned about
It is possible for too much productivity growth to be a problem, if the gains are not broadly shared
Is does seem to me that between off-shoring and robots/advances in AI there are very few jobs that will always require bodies, save direct service and health care (which I know in your world would be off-shored as well). Aside from lower population growth--which I do view as positive--exactly what are people left supposed to do for a living?

...
written by liberal, December 10, 2012 11:37

LSTB wrote,

In his blog, Krugman unfortunately dismissed the Smith/Ricardo/Mill/Henry George/etc. argument that land values are a function of population and productivity and not individual endeavor, so therefore they should be taxed to ensure widespread prosperity.

Completely agree. But did Krugman entirely dismiss the explanation that the decline in income going to labor is now going to land (rather than non-rent-collecting capital)? I thought he raised it and then just didn't pursue it, rather than deprecating it.

...
written by urban legend, December 10, 2012 12:24

Not sure this isn't restating Krugman's obvious point from his post on market concentration, but isn't the ability to raise profits despite lower market costs strong evidence of excessive concentration? If there were real competition, profits would be squeezed proportionally because someone would reduce prices with lower labor costs to gain a competitive edge. Perhaps we have monopsony in the labor market -- collusion to keep wages low -- as well as a sophisticated pricing collusion to avoid actual price competition while keeping inflation at a moderate enough pace to minimize attention to the concentration.

With two or three real decision makers in a market, collusion like this would be a piece of cake -- and since the pricing side of it is merely an agreement to keep prices "reasonable" and inflation low, while monopsony has seldom been subject of an antitrust since the A&P/Robinson-Patman days -- the participants could easily convince themselves there is nothing unlawful about it.

The bottom line is this: with labor costs declining, we should see profits declining, too, if real competition existed. Profits are growing, which means there is not real competition. Obama could build some good will with progressives (and some small business people, too) by unleashing his Justice Department to start a big-splash investigation of excessive concentration in the American market.

Better Question
written by Lrellok, December 10, 2012 12:42

I think perhaps the wrong question is being asked here. If someone walks up to a table and swings a hammer at a mug, one of two things must be happening. Either A) this person does not understand what effect hitting a mug with a hammer will have, or B) this person is trying to break the mug.

What Policy goal is achieved by asserting that 1) The number of workers must increase, and 2) gains in productivity should not translate to an increase in wages?
In my mind, the translation here is obvious. As the supply of labor rises, wages will decrease, while increased labor should increase productivity (assuming the robots argument to be false, since it certainly was not true up until 1947, or wages would have been nowhere near 60% of production.) In short, the entire line of argumentation is a hack attempt to justify the suppression of wages below equilibrium (as wages at equilibrium should correlate to production in aggregate, due to workers shifting to more efficient sectors).

Shared ownership may be the ticket out of this
written by Nick Batzdorf, December 10, 2012 1:30

The more I read about this, the more I think these guys may be onto something:

http://www.cesj.org/homestead/index.htm

To liberal
written by LSTB, December 11, 2012 7:21

Krugman prefers taxing capital ala watered-down Marxism to taxing land. He dismissed land rents as the drain pending further evidence.

To Dean,

Can we get some kind of comment subscription option?

Maldistribution and under consumption
written by Iowan, December 11, 2012 7:17

Whether underconsumption derives from a maldistribution is about as unsupported as anything in casual barroom economics can be. We're not talking here about Louis XIV. The real issue is if there is sufficient savings to fund investment and capital investment to complement the labor force. The former is nothing but political tripe of the left side of the aisle; the latter is nothing more than the political kidneys of the right hand side of the same aisle. Neither bothers to have anything other than platitudes to support its side's position. Toss in government with its 150% propensity to spend for the here and now, and the Fed's fiddling with the interest rate on financing coupled with loan subsidy programs, and the economic issue of whether to eat your cake and have it too is tossed into a meat grinder. Democrats need to disconnect from it's dead Marxist maximum about underconsumption, and Republicans disconnect from its robber baron platitudes. Both need to adopt a factual basis that consumption and saving are the two uses of the same dollar.

"Ricardo's Difficult Idea" & Labor Share of Income
written by Tom Dobrzeniecki, December 16, 2012 7:55

In a very old (2006?) essay ("Ricardo's Difficult Idea"), Krugman wrote that a situation in which productivity gains were not being shared with workers would show up in "labor share of income" stats -- which Krugman claimed was stable (at least at the time).

Can someone explain "labor share of income" to me (has it continued flat, or was it ever flat?) and how L.S.I. relates to productivity gains not being shared with workers (as claimed by Baker)?

The Food is Poison and the Portions are Too Small II: Krugman and Productivity Growth

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