Thursday, September 04, 2008

Meanwhile, In Cloud Cuckoo Land

David Altig, economist of the Atlanta Fed, blogs about the GDP deflator issue. Several economics bloggers, including me and Barry Ritholtz, have argued that the GDP deflator produces a too low inflation number, which given a certain level of nominal GDP growth means that the real growth number is too high. Yet he seems to miss the point by explaining the technical way in which consumer price inflation can be high even as the GDP deflator increases very slowly. But the problem wasn't that we (or at least not me) didn't understand these technicalities. Instead the point is that this methodology gives a misleading picture of reality.

Case in point was today's productivity numbers that came straight out of cloud cuckoo land. The Bureau of Labor statistics today released numbers asserting that productivity rose 4.3%. Productivity is supposed to measure how much value workers produced both for themselves in the form of wages/salaries and other forms of compensation and how much value they produce for the companies they work for in the form of profits plus also the taxes that government receives. And even as productivity allegedly rose by more than 4%, real wages fell and so did real tax revenues (even excluding the effects of the so-called tax rebates). And corporate profits literally plummeted.
So how could productivity soar by more than 4% if all stakeholders see their real income fall (even plummet for shareholders). The short answer is that it can't, as long as we are using the proper and meaningful definition of productivity. The only way this is possible is if we use a meaningless definition of productivity that is unrelated to the actual value created by production, which is what is done.

If the U.S. government, and for that matter also other governments, wants to use such an irrelevant and meaningless number, then there is nothing we can do to stop them (apart from writing posts like this). But no economic analysts should treat them as in any way relevant.


Blogger happyjuggler0 said...

As a thought experiment, what happens to productivity numbers if the lowest paid half of Americans were fired all at once, all else being equal?

I've long noticed that countries like France have high productivity numbers. However they also perennially have a lot of unskilled workers who are unemployed, and thus they don't get averaged into national productivity numbers the way they would if they could get a job like in a civilized country (e.g. the US).

The US increased the minimum wage last month, unemployment increased (coincidence?), and it seems like some of the bigger job loss numbers came from sectors with low wages.

This is consistent with struggling companies cutting adrift "the deadwood".

I am not saying your analysis is wrong, you've been on the money so often that I am always reading your blog. I am just pointing out another possibility that you seem to have overlooked.

Anyway, under my scenario the increased productitity numbers are actually a symptom of bad news, not the good news that one normally associates with such a number.

1:54 AM  
Blogger stefankarlsson said...

Happyjuggler, yes higher minimum wages have the effect of statistically increasing productivity by making the least productive unemployed. However, this scenario is not applicable to the numbers I discussed because they are about the second quarter (April to June) compared to the first quarter (January to March) and the minimum wage was increased in the last few days of July.

Furthermore, the biggest job losses has come in construction and manufacturing, both of which (but particularly construction) have higher than average hourly pay.

10:04 AM  

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