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Thomas Edsall’s Productivity Fears

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Monday, 15 October 2012 10:21

In his NYT blog, Thomas Edsall took off from a recent paper by Northwestern University economist Robert Gordon and warned that we may see a future of very slow economic growth. While Gordon is a good economist, with many useful insights (including in this paper), it is worth throwing in a few words of caution.

First, economists’ ability to predict trends in productivity is virtually zero. There were two major shifts in productivity trends in the post-World War II period: the slowdown that began in 1973 and the speedup that began in 1995. Almost no one saw either shift coming even as the shifts were occurring, much less 3 or 5 years ahead of time. Forty years later there is still no agreement within the economics profession on the causes of the slowdown in 1973. Given this history, it is reasonable to view any projections of productivity growth for the next hundred years and beyond with more than a little skepticism.

With this caution, let me suggest some reasons that Gordon may be overly pessimistic. There are good reasons for believing that we could have large gains in living standards, even if these may not always be picked up in our GDP or productivity measures.

To start with an easy one, we spend more than 17 percent of GDP on health care, more than twice as much per person as the average for other wealthy countries. Yet, we have nothing obvious to show for it in the way of outcomes.

This suggests two obvious paths for gains. First, we can look to get our costs more in line with those of other wealthy countries. This would free up an enormous amount of resources for other uses. If the political system is too corrupt to allow for increased efficiency in the health care sector, we can look to take advantage of the more efficient systems elsewhere through increased trade.

We could also look to have the sort of improvements in lifestyle and diet that would bring our life expectancies up to those of other wealthy country. We are currently more than 5 years behind Japan, the leader among major countries. If we could get even with Japan, somewhere over the course of the century, this extra 5 years, beyond the current path of increase, would be worth more than $250,000 per person by standard measures.

A relatively simple way in which we could have an increase in living standards that would not be picked up GDP or productivity measures is by reducing the standard workweek to four days from five. If we assume that people spend an average of 1 hour on their round-trip commute, this would be an increase in pay per-hour spent working/commuting of more than 2 percent. If we also could stagger workdays and reduce congestion, the gains would be correspondingly larger.

There are several other areas where we might think that somewhere in the course of the 21st century we can progress that will improve society’s well-being. For example, we have roughly one percent of our adult population behind bars. This is both a substantial cost, since we have to pay for their care while they are incarcerated and it is a tremendous loss to these people and society. If we can figure out having a society where we don’t have to lock so many people up, this would imply enormous gains all around. (The incarceration rate in other wealthy countries is about one-tenth as high.)

In the same vein, more than 4 percent of our GDP (5 percent of non-health care GDP) goes to the military. In Europe and Japan, they spend less than 1 percent of GDP on the military on average. If we can manage to get a world where we don’t have major enemies, then the amount of resources devoted to the military could be reduced to European levels, freeing up a huge amount of resources for improved living standards.

There will undoubtedly be many other ways in which society will be improve living standards over the next century (my knowledge of the 2080s is not very good), but the items listed here are all areas that do not require major technological innovations, just restructuring society in various ways. If the bulk of the population does not see substantial improvements in living standards over the next century, the main obstacle will be political, not technology. We already have the technology to allow most people to live much better lives; we just are not using it very well.  

Comments (18)Add Comment
Keep piling it on
written by David M, October 15, 2012 11:19
I'll take your word for it that Gordan is a good economist, but I feel like his report has been the go-to piece for fear mongering among econ journalists. Martin Wolfe, who usually knows better, wrote a column about the study a couple weeks ago and got thoroughly rebuffed from several respondents. Thanks for taking a few swipes at Gordan's conclusions--the more the better. I particularly liked the point about the resources and productivity lost because of our absurd incarceration rate. Hadn't seen that argument before, but it's a good one.
Financial sector also a big drag on economy
written by Robert Salzberg, October 15, 2012 11:33
The financial sector's share of the economy has roughly doubled over the past couple of decades with little besides increased economic instability and concentration of wealth to show for it.

With little need of anything besides broadband access for most financial transactions, fees and the percentage of GDP going to the financial sector should be dramatically shrinking.

4% less GDP going to the financial sector should be a reasonable goal. The current class action lawsuit regarding the monopoly practices of credit card swipe fees is a good example of how we're collectively being extorted by the financial sector.
...
written by skeptonomist, October 15, 2012 11:59
Productivity gains over the last 300 years or so have been largely driven by the replacement of human and animal power by machines driven by fossil fuels, and refinement of those machines. These fuels will eventually run out even if they can continue to be used, so unless replacements are found there could be a disastrous reversal in productivity. These effects could easily be felt within a hundred years. Those who have irrational faith in the the powers of the (modified) free market may think that cap and trade will solve the problem, but there is no guarantee of that at all. The sorts of things that economists worry about within the context of typical "free-market" economies may be largely irrelevant with respect to the problems of the future source of energy and global warming.
Gordon's Data is Wrong
written by AlanInAZ, October 15, 2012 12:00
The reference post from Roger Pielke's website claims that the supporting data in Gordon's paper is wrong and he will not publish a correction.

http://rogerpielkejr.blogspot....rowth.html

This is a widely quoted paper and I think the quality of the data should be verified.

...
written by kharris, October 15, 2012 12:14
The point that the US spends more on health care to get less than other developed nations, and that the US could adopt policies to correct that, highlights composition as a source of productivity improvement. By shifting resources from a low-productivity sector to a higher-productivity sector, overall productivity (and presumably, overall welfare) can rise without new technological miracles. Of course, one way of doing that would be to shed resources from the insurance and medical paperwork sectors. Or from finance. Or lobbying.

Beyond that, Dean seems to be slipping back and forth from productivity to living standards and longevity. It may be true that we can live longer and more healthily with changes to behavior and to our medical culture, but longer life does not, by itself, improve overall living standards in a given period of time - however much it may improve things for those alive and well who would have been sick or dead. That $250,000 in welfare that could come from living longer is not the result of more output per hour, but of more hours of life.

It's reasonable to argue that the right goal is a good standard of living, and that productivity is merely an element in producing that good standard. That should not lead to confusion between living standards and productivity. Gordon argued that innovation is likely to slow, and with it, productivity. A welfare improvement due to longer life would be, as it is said in the jargon, orthogonal to Gordon's point.
...
written by Jim Naureckas, October 15, 2012 12:57
Humanity will be forced to find different ways to power society; it seems likely that these will be better ways, laying the groundwork for at least one more round of productivity gains.
What do economists mean by "productivity" anyhow?
written by Ron Alley, October 15, 2012 1:49
We all have a notion of the meaning of "productivity" as we us that term in our everyday work. But what do economists mean by "productivity"? And what are the units? When I read both the Thomas Edsall piece this morning and Dean's reply, I realized that both assumed a definition for "productivity" and neither expressly stated that definition. Are we talking about GDP per capita? Are we talking GDP per hours worked? How would economists measure and compare the "productivity" of a police officer, a Wall Street trader, a toolmaker and an engineer? If you really understood the economists use of "productivity", would you view Gordon's ideas differently?
scolds
written by Peter K., October 15, 2012 2:00
The Time magazine econ columnist wrote about this too. The mainstream media/academic economists were wrong about financial deregulation and the housing bubble so why shouldn't they be wrong about this also?
productivity=output per worker...typically
written by pete, October 15, 2012 2:16
With vast capital/labor disparities, productivity will (likely) continue to grow on a global scale as labor and capital are matched better, either through relaxed immigration laws, or improved property rights overseas. Global GDP will rise rapidly...a lot of the gains will go to capital, which is the scarcest resource. This will likely mean increased (global) inequality along with reduced poverty.
medical tourism sample costs (including airfare!)
written by David, October 15, 2012 2:31

Medical Procedure
USA
Colombia
Costa Rica

Heart Bypass$144,000$14,802$25,000
Angioplasty $57,000 $4,500 $13,000
Heart Valve Replacement$170,000$18,000$30,000
Hip Replacement $50,000 $6,500 $12,500
Hip Resurfacing$50,000$10,500$12,500
Knee Replacement $50,000 $6,500 $11,500
Spinal Fusion$100,000N/A$11,500
Dental Implant $2,800 $1,750 $900
Lap Band$30,000$9,900$8,500
Breast Implants $10,000 $2,500 $3,800
Rhinoplasty$8,000$2,500$4,500
Face Lift $15,000 $5,000 $6,000
Hysterectomy$15,000N/A$5,700
Gastric Sleeve $28,700 $7,200 $10,500
Gastric Bypass$32,972$9,900$12,500
Liposuction $9,000 $2,500 $3,900
Tummy Tuck$9,750$3,500$5,300
Lasik (both eyes) $4,400 $2,000 $1,800
Cornea (both eyes)N/AN/A$4,200
Retina N/A N/A $4,500
IVF TreatmentN/AN/A$2,800


This was pulled from one company's website. Will they accept vouchers?
self employed
written by geojos, October 15, 2012 2:40
If innovation is one of the main drivers and engines of growth, a few questions. It is hard to believe that it peaked, but is there a couple of factors that is hampering major technological changes. First, many of the innovations were fueled by government actions and spending. That for the most part has stopped except for some military spending. There are a number of risky and costly steps for an innovation to become marketable, and the early stages are too risky for venture capitalist or the private sector. Thus many stay in the 'garage". Other governments seem to help with these stages, as this country once did. No doubt that corporations do not like competition, and if something comes out that threatens their territory and markets, they find ways to kill or buy it and then kill it. If these are all true to a large degree, then isn't the technological problem present day economic practices, which may take political remedies to address.
Productivity
written by Gar Lipow, October 15, 2012 4:22
In response to those who think Dean is confusing living standards and GDP - increase health and life expectancy has been documented to increase GDP. And prioritizing GDP over health and life expectancy is foolish in any case.

Incidentally, even without technical breakthroughs there are huge opportunities for energy efficiency, renewable energy, low input agriculture and so on. One side effect of all of this would be cleaner air and better health, both of which have been shown to increase productivity. And we could phase out over 95% of fossil fuel use with today's technology. Depending on how much efficiency we implemented this might not even have a gross cost compared to fossil fuels. But when we consider positive economic externalities from replacing fossil fuels with less polluting alternatives, GDP would be higher than under a continued fossil fuel scenario, and more reasonable measures of well-being than GDP would show even better gains. You can find out more about this at my book site: solvingtheclimatecrisis.com
The Big Unanswered Question
written by duckmonkey, October 15, 2012 5:44
I wish Baker (and Krugman) would provide an answer to this crucial question: Aren't the general policies they advocate ignoring the threat to human life posed by our economic system? Even if tomorrow we adopted all Baker's recommendations -- Keynesian-style stimulus, patent reform, stricter regulation of the financial sector, progressive taxation, more real competition among doctors and other professionals, and so on -- we would STILL be rushing headlong toward the doom of global warming.

Instead of spending so much time skewering imbeciles like David Brooks and Thomas Friedman, why not engage in this more serious discourse?
economy and the economy
written by paul, October 15, 2012 7:25
@duck, you would probably agree that global warming (or rather its response) is very much much an economic matter: 1) How will the economy be managed optimally so as to free up to resources to pay for changes in technology and infrastructure and a host of social adjustments. 2) How will it this be done fairly so that there will be a democratic consensus and solidarity behind an epochal challenge.

Here's the thing, if we can't get the powers that be to rely on textbook econ to manage the current recession optimally and fairly, a much smaller problem, how we can expect them to deal with the mega-crisis? Hopefully (maybe pollyannishly) there will be political lessons learned from the "small" crisis to the mega one.

...
written by Ron R, October 15, 2012 8:04
Didn't the slowdown in productivity in 1973 derive from the oil shock? In 2010 dollars, oil went from about $15/barrel to about $45/barrel.
These guys don't understand math
written by A Populist, October 16, 2012 7:11
Dean,

I read the linked article.

These guys are pessimistic about the future of middle class lifestyle, to the point of absurdity.

I don't think they understand that even if productivity GROWTH declines, that living standards will still rise, albeit more slowly.

I think that is a critical flaw - they simply don't have an intuitive grasp of math.

Well, the beltway all got taken in by Ryan, because they don't know Arithmetic.

So, it shouldn't be surprising that the beltway (and many economists, apparently) don't know Math.

And the idea that it is inevitable that the middle class should get an ever smaller piece of pie, even as the pie itself continues to grow, is just Ugly.  (Their pessimism implies, not just that the middle class gets a *proportionally* smaller piece, but an *actually* smaller piece in absolute size).

Of course, the other points are well taken, but I don't think these guys really understand that a slowdown in productivity GROWTH, does not mean a shrinking pie.
...
written by skeptonomist, October 16, 2012 9:18
Even if the energy and global warming problems are solved - and there is no guarantee whatsoever that they could be, or especially that private enterprise could do it - we are still faced with the problem of increasing population. Resources apart from energy are limited, and there is no law of economics (or of biology) that says population will be stabilized at a level which allows a high standard of living. In fact Malthus claimed to demonstrate that the equilibrium level would be poverty. That the world, at least in developed countries, is not now Malthusian is probably owing to the boost from fossil fuels. The boost from replacing human labor with machines will come to an end no matter where the energy comes from. The limiting factor will be population versus resources, not technology.
...
written by PeonInChief, October 16, 2012 10:50
There are an amazing number of quality of life improvements that come with a reduced work week. When California state workers were on 3-day-a-month furloughs, people wrote about the pay reduction (15%) that came along with it, but they wrote more about what they were doing with the time--engaging in a hobby, having less-stressed errand days, volunteering at their kids' schools, working at the food bank, etc. If we could do that without the reduction in pay, the happiness quotient would be much higher.

In fact, when they ended the furloughs, many people started taking vacation days so that they could continue their happiness-increasing activities.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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