Thoughts On Summers On The Productivity Slowdown

I received this *.pdf and an invitation to read it from my colleague and sometimes co-author Alessandra Pelloni. I had a lot of thoughts which I post here as they can’t do any harm.

Two comments before the jump and 5 after the jump.

I think it will be hard to massage the data away from the conclusion that
when there are recessions, subsequent output growth is lower. The
question is, is the relationship best thought of as causal. After all, if
productivity slowed down, you might expect investment to slow down,
you might expect the stock market to go down. And so, if events were
happening that were reducing the underlying rate of growth, and people
came to realize that those events were happening, you might expect the
economy to go into recession.
And so the question where there’s certainly much more room for argument
is whether the relationships I described are causal. And here, there’s no
God’s truth. We don’t get to contrive recessions to do a controlled
experiment on the question. Blanchard and I do what I think is the sensible
way to approach the question, which is we look at recessions with
different causes. We look at recessions that are associated with tight
money to reduce inflation. That seems like a relatively pure case of a
demand side reduction. We look at recessions that follow the bursting of
bubbles. We look at other recessions not associated with those kinds of
events. We look at recessions associated with fiscal contractions. We look
at recessions associated with credit contractions.
Separately, I have looked at declines and output associated with fiscal
contractions and what has happened to potential GDP revisions in
response to those contractions and I would say that a summary of that
research is that economic logic is borne out the apparent hysteresis
estimate from a demand side recession is lower than the apparent
hysteresis estimate if you look

this is very interesting. I haven’t read the paper which he cites . I agree with Summers that more better be done on this topic.

I have some thoughts. One is housing again. Housing investment is just as much a part of aggregate demand as investment in plant and equipment. However, it has less to do with labor augmenting technological progress. I think conceptually it is more like durable goods purchases for an extremely extremely durable good. A housing bubble bursting is different from a high-tech bubble bursting.

Another is what about long term effects of periods of extremely high demand (also known as wars). Wars are not caused by good technological progress. This is government spending and X and works better for military spending than for total spending.

Another is what happens to estimates of the natural rate of unemployment. In theory it shouldn’t depend on productivity growth. The original story by Friedman referred to labor market institutions. The old Blanchard and Summers 1986 hysteresis paper was about employment not output. A productivity slowdown might cause a recession (if as argued firms don’t notice and keep on investing a lot, then suddenly cut investment when they realize). It should not cause elevated unemployment a decade later.

Suddenly loose monetary policy. After the stock market crash of 1987, the non independent Bank of England (aka Thatcher) panicked and loosened monetary policy. It turned out that UK unemployment didn’t have to be high after all.