Sunday, August 6, 2017

If You Read Only One Lengthy, Dense Economic Report This Year....

It should be this one:


The report, by economist J.W. Mason for the Roosevelt Institute, is clearly written, closely argued, well documented and makes a compelling and very important case. The report is particularly good on the relationships between and among growth, productivity and the strength of demand. Here's perhaps the key argument:
While textbook theory suggests that productivity growth is a supply-side phenomenon, dependent on autonomous technological change and not on demand, we suggest that there are a number of reasons to expect strong demand to be associated with more rapid productivity gains, and weak demand to be associated with slower gains. There are a number of reasons to believe that weak demand has played a role in the exceptionally slow productivity growth of the past decade. First, the productivity slowdown has been spread out over a wide range of industries, including retail trade, services, transportation, durable and nondurable manufacturing, and other sectors. While the high-tech sectors that drove productivity gains in the 1990s have seen the largest falls in productivity growth, they account for only a relatively small portion of the overall slowdown. The breadth of the slowdown makes it hard to interpret in purely technological terms, or as simply the end of the exceptional productivity growth of the tech boom period. Second, the combination of slow productivity growth and slow employment growth is historically unusual; normally these two trends move in offsetting ways. A simultaneous decline in both is, historically, more typical of business-cycle recessions than of extended periods of slower growth.
Finally, the state of the economy as a whole is inconsistent with a story of tightening supply constraints. Macroeconomic theory—as well as history and common sense—strongly suggests an autonomous decline in the available labor force or that the pace of technological progress should be associated with higher inflation. The signature of a negative supply shock is lower output combined with higher prices. Normally, a central bank responds to a negative supply shock with contractionary policy—higher interest rates—in order to bring the level of spending in the economy down to the new, lower level of productive capacity. Yet the past decade has seen consistently low inflation even in the face of ultra-expansionary monetary policy—exactly the opposite of what we would expect from a fall in aggregate supply.
Given this picture, we think there is a strong case that slow growth is largely, if not entirely, a product of weak aggregate demand.
This is a very important analysis and I think largely correct. The most important implication is that there is nothing intrinsic or structural to recent sluggish economic performance. It is the refusal to attack weak demand with public investment, active fiscal policy and other measures that is to blame. Democrats take note.

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