An important story today from Bloomie:
Federal Reserve Chairman Ben S. Bernanke and his colleagues are suffering through their own form of cognitive dissonance: revealing new concerns about the economy’s long-term prospects even as they forecast faster growth in 2014.
Bernanke has portrayed the past few years’ deceleration in productivity as temporary. In an argument also espoused by Fed Vice Chairman Janet Yellen, nominated to succeed him next year, he suggested companies were forced to add workers even though economic growth was slow because they cut payrolls so much during the recession.
Worker productivity, a key component of an economy’s health, has risen at an annual clip of 1 percent during the last four years, as the U.S. has struggled to recover from the worst recession since the Great Depression. That’s less than half the 2.2 percent average gain since 1983, according to data from the Labor Department in Washington.
“Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, according to the minutes released last week. That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued.
A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs.
In other words, de-industrialisation. Western economies haven’t really produced any startling innovations for decades. There’s the internet and digitisation of course, but these are largely distributional innovations – like a new way to buy – not new methods for producing more widgets more swiftly to produce higher standards of living. And when you put them in the context of the kind of lifestyle transforming innovations of the post-war period they are vapid by comparison.
Welcome to the decline of the West as it bleeds its productivity generating capacities to the developing world:
“We’re in a slow-growth period of unknown duration,” said Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel prize in economics.
In his latest book, “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change,” Phelps argues that the U.S. has become sclerotic as entrenched corporate interests have stifled innovation.
…That, in turn, would have far-reaching implications for policy makers, company executives, working Americans and investors. Fed officials would need to be more alert to inflation risks if growth picked up. Lawmakers would face even more difficulties reducing the budget deficit because tax receipts would be lower. Companies might have to settle for reduced revenue, employees for smaller paychecks and investors for diminished returns as a result of the slower expansion.
Nah, that’s rear view mirror stuff. As skills atrophy, capacity languishes and developing nation productivity rollicks along, there is still plenty of disinflation in the system. The inflation is where we all know it to be, in asset prices, in a convulsive and repeated attempt to generate the growth that just won’t come through the sustainable channels of yesteryear. As Larry Summers declared recently, via Paul Krugman:
[H]ow can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment — that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.
Australia, too, has this disease though we are perhaps fortunate to have an economy so bogged down in layers of government and interests that another period of high productivity growth may be possible. Ecological business is another frontier with great possibilities to generate productivity gains.
If only we had the courage to pursue either.
