Wednesday, September 7, 2016

How RGDP got its slopes?

I think I may have learned more things about more subjects from reading Brad DeLong's blog almost every day for the past several years than from my entire college experience, so in no way do I want this to be read as disparaging, just cautioning. This may well even be correct:

The current discussion of “slow growth in measured productivity” here in the U.S. seems to suffer from a great deal of confusion. From my perspective, there are six things going on:
  1. Since the 1920s, the rise of non-Smithian information goods…
  2. Since 1973, the productivity slowdown…
  3. Since 1995, the semiconductor-driven infotech speedup…
  4. Since 2004, Moore’s Law hitting the wall…
  5. Since 2008, what we will soon be calling “The Longer Depression”…
  6. And, remember, policy changes to speed productivity growth may well be nearly orthogonal to all of the above save (5)…
To talk about the cause of “slow growth in measured productivity” as if it is just one, not five, things causes confusion.
I agree that you should definitely keep in your head the possibility that anything you observe may have more than one contributing factor! However you should also keep in mind that the other extreme -- a collection of just-so stories that explain your personally selected features of one particular measure of the economy -- can cause just as much confusion.

One information equilibrium model says that NGDP has been roughly on trend the entire post-war period:

The gradual decline in NGDP growth is explained in this model by it becoming more probable that a given dollar is facilitating a transaction in a low-growth industry (that the distribution shown here shifts to the left with increasing size of the economy).

Is this correct? I don't know, but I'm doing my best to test it against new data in order to mitigate the possibility of fooling myself with just-so stories.


  1. Perhaps I'm missing something, but I've thought one large factor in the productivity slowdown since 2008 is the slowdown in investment that accompanies economic slowdowns.

    1. Well, NGDP = C + I + G + NX and I is the most cyclical component, so with any recession a big change in RGDP = NGDP/P is going to be associated with a big change in I/P (real investment). A larger recession is going to have a larger fall in I/P.

      But as these are all just definitions. "I" is just the leftover partition of currently produced goods and services that aren't consumption, government spending or net exports (the well-defined three). Basically a fall in RGDP is a fall in at least one of, if not all four: C, I, G, and NX. However saying one or more of these components fell doesn't necessarily explain what has happened since those components are just names we've made up.

      For further (and more nuanced) thoughts on this, check this post out.