Stop talking about productivity

“I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” So said Winston Churchill.

A variant might be: “I cannot forecast to you the growth in productivity. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is stable NGDP growth at an appropriate level.”

Hard to grasp
Productivity is extremely hard to grasp as a practical, measurable thing. It was never as easy as people thought it was for manufacturing. Henry Ford did not improve productivity for car production via investment as much as through his entrepreneurial vision of how to organize production, something incredibly intangible.

At least Ford produced something relatively measurable with relatively straightforward inputs. That is not the case in the post-WW2 world dominated by service industries.

Of course, macro-economists have poured over the general problem in exhaustive efforts but have got not very far. Productivity is really the “secret sauce” of economic growth and development and always ends up being a massively contentious political issue. Sources of productivity growth can range from simply more capital investment to technological improvement to more free markets or … less free markets (depending on your point of view).

Even something as apparently uncontentious as “more capital” ends up mired in debate once it is framed as a question about “infrastructure”. Do bridges to nowhere improve productivity? Or, alternatively, destroy wealth? Or, count as fiscal expansion? Or, are inevitably offset by monetary tightening?

So little good work on service sector productivity

There is only one report I have ever found analyzing productivity across countries in the services sector. It is quite old now, published by the NBER but even then, it was outsourced to a pair of consultants from McKinsey.

For all the theoretical work on TFP and technology, macro-economists spend almost zero time actually investigating facts like those McKinsey attempted to analyze. That sort of detailed work is beneath the dignity of macro-economists and best left to the micro-guys to sort out. The management consultants used the NBER but based their methodology on an even older piece of published work … from 1992.

The UK’s Office for National Statistics in 2016 published a report showing the apparent awfulness of UK productivity versus other developed countries, but hopelessly failed to do any work to understand either why the numbers might be wrong or the causes for they being right.

It included this remarkable table with no comment. Is it really plausible that UK productivity in a “sector” covering 70% of the economy really fell, relatively, 20% between 2010-2014?

Why was there no commentary? No attempt to explain this bizarre result. Partly because it is hard.

So little underlying data makes any sense. At the level that might make sense, the company level, it is mostly private. In addition, much is political, as labor unions hate productivity studies in all their forms. Much is conceptually difficult, e.g. How do you define productivity in the healthcare sector, the government sector, the telecoms sector, the IT sector, the retail sector etc. etc. What is the output of any of these sectors except sales? In the case of free or subsidized services produced by governments, it is just “services”.

NGDPLT a necessary condition for healthy RGDP growth

What is much clearer is that reliable, steady, NGDP growth at an appropriate level is a necessary but not sufficient condition for reliable, steady, RGDP growth. It is part of the secret sauce for productivity gains but cannot do the whole job. Without it, there will be weak RGDP growth and thus weak productivity growth.

In other words, productivity is endogenous to the system, so it is useless to talk about it as a stand-alone ingredient.



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