Notes on productivity

As had been trailed, the OBR cut its forecasts for productivity growth and hence GDP growth yesterday. Here are some miscellaneous thoughts on this.

1. If the OBR is right, this means the 20 years to 2022 will see the worst productivity growth since 1891-1911, and close to the slowest growth since the early 1800s.

2. The OBR might not be right. It says there’s “huge uncertainty” about its forecasts. One reason for this is that we don’t really have a terribly robust theory for forecasting such growth. The OBR’s past forecasts were too optimistic because it essentially assumed growth would return to trend. We know that was wrong. But we don’t really have much better ideas.

3. The ONS estimates that productivity grew 0.9% in Q3. That’s inconsistent with the OBR’s forecast of zero growth this year – but it is little more than a straw in the wind.

4. Weak productivity growth isn’t wholly a bad thing, as it keeps people in jobs. As Amit Kara and Ana Rincon-Aznar point out, there has been a negative relationship between employment and productivity.  Granted, this trade-off might be the result of bad macroeconomic policy. But bad macro policy is what we’ve got.

5. There’s a significant difference between the UK and US. In the US the main reason for flat real wages has been that monopoly power has risen and the labour share has fallen. In the UK, the labour share has been reasonably stable recently; the main reason for weak real wages is weak productivity.

6. History tells us that productivity growth has really only been much above 2% during the post-war era. This poses the question: to what extent was that growth due to us catching up on innovations which had been delayed by the war, and to what extent to the possibility that neoliberalism in fact retards productivity growth? A lot hinges upon this question of economic history.

7. If productivity and income growth remains weak, future governments will have to look elsewhere for revenues. The possibility of taxes on wealth (as advocated by Roger Farmer) or land thus loom larger.

8. Robert Colville – who’s more sympathetic to Hammond than I – says there “was little sign of a serious assault” on the productivity problem in the Budget. He’s right. For example, the National Productivity Investment Fund won’t launch until 2022.  

9. We don’t really know the precise causes of the productivity slowdown. There are many contenders. I’m not sure, though, that we need to know for policy purposes. I’d advocate a broad spectrum approach of many measures such as: policies to encourage investment and innovation, which might range from tax reform to a state investment bank; more infrastructure spending; better education and training; greater worker democracy; an attack upon rent-seeking and measures to raise entry (pdf) and exit in product markets. Most of these policies are worth doing even if their impact on productivity is slight.  

10. Duncan Weldon tweeted:

I suppose a small open economy slashing its growth forecasts even as global growth picks up at least shows that policymakers aren’t powerless in this globalised world.

But maybe their power is asymmetric. Governments with trend growth rates might be like monkeys with computers: they can’t improve them, but they can wreck them.

Comments

[Rich]

Question from a novice economist: How certain are we that the productivity figures are real? Does everything being free on the Internet have some sort of effect?

[Dipper]

Surely what has happened here is the OBR has given up forecasting. After years of predictions that have failed they've simply decided to forecast that if everything remains the same then everything will remain the same.

This has been obvious for a good long while, and the blame lies with chancellors pretending to be SuperEconomist bringing salvation to a grateful nation through their economic genius rather than actually changing anything. Twiddling with the tax rate or deficit isn't going to magically make someone with no skills have internationally viable skills.

This is why folks like me voted to leave the EU. We were on a technocratic road to nowhere inside an economically sealed low-growth zone. The challenges of competing in a world market will force us to develop world class skills for our people, develop world-class institutions and infrastructure, and growth and productivity will follow.

[gastro george]

"The challenges of competing in a world market will force us to develop world class skills for our people, develop world-class institutions and infrastructure, and growth and productivity will follow."

What has stopped us from competing on the world market previously?

[Dipper]

@gastro george - fair question - the conviction of chancellors such as Brown and Osborne that their actions alone could deliver growth and productivity.

[Neil Wilson]

If you have access to endless cheap labour subsidised by state tax credits, there is no need to invest in new capital. You can sweat the old capital with bodies.

You can see the productivity issues at every hand car wash in the nation. The parasite businesses Nick Hanaeur speaks of are being maintained, not eliminated.

[gastro george]

"... the conviction of chancellors such as Brown and Osborne that their actions alone could deliver growth and productivity."

Why would a company be deterred by their convictions?

[Dipper]

@ gastro george - "Why would a company be deterred by their convictions?"

1. Gordon Brown brought in working tax credits that put a 90%+ marginal rate of taxation on workers over a certain limit, disincentivising workers acquiring better skills and working harder. So a large part of the UK workforce was not incentivised for improvement in productivity or growth.

2. firms need roads, transport, broadband etc. Osborne cut back on expenditure on all these.

[gastro george]

Well I don't think companies consider their workers' marginal tax rates when considering investment. Infrastructure sure. But, as you can imagine, what I'm interested in is what is tangibly different between now and post-Brexit that's going to lead to this economic miracle - to positively affect company investment and competivity.

[Bill Posters]

We don't make enough stuff.

We now import a lot of stuff from China. The decisions on the investments in capital goods required to supply the UKs stuff are made in China by the Chinese. The capital goods themselves are then imported to China from Germany and Japan.

The European single market in goods is nothing like the single market in US states. German police cars are still pretty much all made in Germany. The UK police buy Cars from all over. Germany still has more value added high productivity jobs making cars. In the UK we have a lot of people paid to wash cars.

Run the economy hard enough for long enough and many of these problems will go away.

Another theory on productivity. Too many of the UKs most talented are writing blogs or tweeting or reading blogs and tweets.

Go to bed Bill work on ladders in the morning.

[rogerh]

I would question whether it is even possible for a country like the UK to re-invent itself as a dynamic economy. We have let manufacture go, high level services require more brains than the Bell Curve will supply. Our human stock is of the ordinary kind. We have spent less on education and infrastructure than our competitors. Our USPs are property, a safe haven for cash, a good top level academic structure (but poor lower down) and a back story of stability. Overt corruption is at least controlled and covert corruption has moved well beyond the brown envelope stage.

Now what would a developing dynamic country look like. A young population, not too many oldies, a degree of poverty or desperation in the collective mindset to drive ambition. Lowish wages and lowish housing cost, little in the way of social services, not much whining about environmental matters, sufficient land to build infrastructure and a somewhat authoritarian government that manages to keep corruption not too visible.

Short of a Mao Zedong revolution, killing off most of the middle and upper class, starving the oldies and making the National Trust a proscribed organisation we are not likely to re-invent as a young dynamic economy. This is why I doubt leaving the EU will solve anything, Dipper's Dream will simply not come true. We are stuck with little option but to become more like our neighbours and to fit and adapt in as best we can. Efficiency of government with sensible long term plans looks the only way to go. That means giving up so called 'sovereignty' and recognising that we must snuggle up with our neighbours like pigs in a sty - for mutual warmth and protection.

But leaving the EU might give an opportunity to combine the two economic models. We could by necessity cut social support, bleed the wealth of the oldies, run a low wage, low regulation economy. Be very like the young dynamic countries but retaining an overburden of the old entitled upper middle class. This could be done except for the fact that no one will want to build factories in an essentially pariah state. There would have to be a good reason to build giga factories in the UK and I cannot see the economic and social factors would let that happen.

One way or the other our concept of democracy and sovereignty will have to change.

[Alex]

"The jewish banks finance whites to over consume as they have been building into since 1492 when they helped queen izzy finance Columbus's expedition"

Chris, are you going to leave this turd stinking up the place?

[Blissex]

«In the UK, the labour share has been reasonably stable recently; the main reason for weak real wages is weak productivity.»

In so few words so much handwaving away of a number of important disaggregation issues! That's amazingly high productivity :-)

[Blissex]

«This could be done except for the fact that no one will want to build factories in an essentially pariah state.»

As soon as countries like Poland, Bulgaria and Slovakia joined the EU it was clear that nobody would build a new factory or office in the UK except retail-related. It simply does not make any sense: eastern european wages are 1/3 to 1/6 those in the UK, not merely 30% or 60% lower.

Whether the UK remained only made a difference as to how fast production plants and offices would move to eastern Europe.

Now, fortunately for the english upper class, the english working class have voted enthusiastically to move outside Fortress EU and put themselves in direct competition with the labour reserve armies of Bangladesh and the Philippines.

«There would have to be a good reason to build giga factories in the UK and I cannot see the economic and social factors would let that happen.»

What about a 30%-50% fall in english labour costs?

What about the creation, starting in Sunderland, of Free Enterprise Zones with no regulations, no direct taxes, no labour laws, no immigration or customs restrictions, staffed almost entirely by indentured african and asian serfs eager to work for £2-3 per hour?

[Chromatistes]

A very perceptive piece. Plenty of candidates for the bogeyman, partly according to one's own prejudice. Without claiming to be Fowler's 'monster of omniscience', I offer up a combination of past Keynesian interventions and the demographics of the Baby Boomer generation moving into retirement, with associated changes in the dependency ratio. Others more gifted than I will advance competing explanations ...

[Blissex]

«We don't make enough stuff. [ ... ] In the UK we have a lot of people paid to wash cars.»

That is sort of both a good and bad way to look at the issue.
It is a bad way is that conceivably immaterial output can be more valuable than material product.

It is a good way because for a lot of immaterial output, like washing cars, "productivity" is difficult to measure and in many cases it is even meaningless.

The issue that makes discussions of productivity difficult in the aggregate, without looking at the details, is that there are two ways to measure it: production (GDP) per hour, and income (GDI) per hour.
Unfortunately statistical agencies as a rule replace production with income when they have difficulty measuring output.
Also production, in the few cases where it is actually measured, is expressed not in physical terms, but in money terms.

Using income to estimate production (and also using money production instead of physical production) makes discussions about aggregate "productivity" handwaving and meaningless.

Consider the cash wash example: the real productivity of it is "cars washed per hour", but in practice it gets reported as "income from car washing per [hour|hourly wage]" which is something entirely different.

And never mind for production of entirely immaterial output, like for example a book, where "productivity" as reported depends entirely on the sales of the book, as noted bu this guy:

http://www.harrowell.org.uk/blog/2017/10/15/demand-determined-productivity/

Ultimately "productivity" ought to be a way to gauge the efficiency of production, on particular the amount of "surplus" per hour of work.
That is fairly easy to do for the primary sector and much of the secondary sector, not so much for the tertiary (which also in many cases produces no surplus but only redistribution of existing surplus, e.g. finance).

[Blissex]

«This is why folks like me voted to leave the EU [ ... [ competing in a world market will force us to develop world class skills for our people,»

Sometimes extreme neoliberal "Leavers" are very funny in their "jam tomorrow" dreams: what if the challenge will be be instead to develop "world class" wages, that is £2 per hour?