Arnold Kling  

A Minsky Recovery?

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As always, there are conflicting views on the economic outlook. Daniel Gross is optimistic.


In the third quarter, productivity--econospeak for companies doing more work with the same amount of labor--rose at a 9.5 percent annual rate... But just as hamsters can run only so fast on their treadmills, there are limits to productivity growth. "If you look at economies over many centuries, you can't grow productivity for 7 or 9 percent for more than two or three quarters," said Lakshman Achuthan, managing director at New York-based Economic Cycle Research Institute, whose leading employment indicators are looking up. "At a certain point, people will start to collapse at work."

Pointer from Mark Thoma. I think that this is a misleading way to look at productivity. Remember Garett Jones' point that workers are building organizational capital, not producing widgets. We can get increased output without much increase in labor input.

Meanwhile, Nouriel Roubini writes,


The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

So we can expect that job losses will continue until the end of 2010 at the earliest.

Pointer from WSJ Real Time Economics. At the moment, the stock market seems to me to be siding with the optimists. Ben Bernanke is with the pessimists.

I am leaning toward the optimists. I do think that the productivity number is important, because it signifies profits. Profits are an important precondition for recovery, particularly if one takes the Minsky model seriously. Recall that a year ago people were talking about a "Minsky moment."

Hyman Minsky's view is that in good times, firms get more and more confident and willing to use leverage. In bad times, they resist borrowing and instead fund expansion out of profits.

I am sympathetic with Minsky's view. In the Garett Jones world, hiring a worker is as much a capital investment as is buying a machine. I think that as profits continue to improve, firms will be willing to make more investments in both equipment and workers. This will produce a recovery in employment. So, although I do not exactly agree with Daniel Gross's reasoning, I share his optimism based on the recent productivity trends. Contra Roubini, I would bet that jobs will be increasing by June.

The Recalculation does not happen quickly. But it does not take forever, either.


Comments and Sharing





COMMENTS (16 to date)
Daniel Kuehn writes:

RE: "I think that this is a misleading way to look at productivity. Remember Garett Jones' point that workers are building organizational capital, not producing widgets. We can get increased output without much increase in labor input."

But isn't this an empirical question? Some of the productivity growth surely comes from the fact that you fire the unproductive workers first. Some of it surely comes from "true" productivity gains. I'm not sure you can just declare that one story is right and one is wrong. They're both right - the question is how do you parse the productivity growth between these two interpretations.

Marc D writes:

I think the ECRI comment on jobs and productivity is a cyclical one, i.e., fairly short term in nature. Other commentors seem to be talking over the longer term, i.e., many years.

Gary Rogers writes:

Here is my take:

We have an economy that is supported by interest rates that are near zero. With these low interest rates, the dollar is falling and who wants to hold assets that are falling in value. That means money will be invested somewhere, which makes all the Keynesians happy. So, where is all the money going? The amount of money injected over the last year makes inflation almost inevitable so bonds are a dangerous proposition. This forces the investment into gold and equities. We have a new bubble financed by our treasury and the more it grows, the more everyone wants to buy into the promise that good times are here again.

Unfortunately, we are doing this at the expense of our currency and increased debt. Eventually (within the next three years) interest rates must increase and our fragile economy, unable to support the higher rates, will collapse again. I guess that makes me one of the pessimists.

If only we had someone in charge that understands economics.

Doc Merlin writes:

How is this any different than the Hayekan trade cycle?

Doc Merlin writes:

What would the effect of a crash in commercial property right now be? Would it cause a double dip, would it help us out of recession by reducing prices, what would the effect be?

I mean, would it speed up the recalculation or cause the need for more recalc.

q writes:

Dr Kling -- can you state a testable hypothesis re: the Recalculation theory?

Ryan Vann writes:

"How is this any different than the Hayekan trade cycle?"

I don't think it is.

Dirtyrottenvarmint writes:

Productivity may be econospeak for doing more work with the same amount of labor, but I suspect many economists don't know what they are talking about.

In this case, I do not see how what is being called productivity matches that definition. The statistic being measured as productivity can be increased, while holding hours worked and hourly wages (Labor) constant, by

A) Increasing the number of units produced
B) Increasing the price of units produced
or C), both of the above.

This can be accomplished, ceteris paribus, by

A) Decreasing unit quality (assuming this also decreases production times/increases production output) while holding prices constant
B) Increasing prices with no corresponding increase in unit quality
or C), all of the above.

When the price of a good increases for no competitive reason, we might call this price inflation. Most economists would probably agree that it may be possible to cause price inflation by massively increasing the money supply.

Interestingly, a massive increase in the money supply is exactly what occurred in the third quarter. Also vaguely of interest is that the largest increase in "productivity" occurred in the manufacturing sector. I believe automobile manufacturers are considered part of the manufacturing sector. I recall that the Car Allowance Rebate System was active in the third quarter.

Just off the top of my head, given the massive, ground-shaking, record-breaking amounts of new government spending that was thrown against the wall in Q3, I would be Extremely Surprised were the statistic being called "productivity" not to have shown a significant increase.

I am interested in Arnold's interest in profits. Arnold has written and spoken many times (and, dare I say, wisely) about the importance of profits. However, I cannot find a Kling Definition of "profit" beyond the simplistic "revenue minus costs", which as discussed above is clearly lacking in sophistication. I am interested in why Arnold thinks these third quarter "profits" are at all economically meaningful, given that a company can apparently increase "profits" simply by sending a couple high-class hookers to the right politician.

Dr. T writes:

"We can get increased output without much increase in labor input."

Bullcrap. I've run businesses (clinical laboratories). Three of the labs I directed were very high productivity (using industry norms as comparisons). Getting substantially increased productivity out of such labs without adding personnel requires one or both of the following: purchase of expensive new instruments that are much more automated than existing instruments or firing back room staff and hiring more lab techs. However, in a well-run lab, the back room staff (personnel, billing, computer support, HR, pay & benefits, general admin, etc.) already is lean. That leaves only option 1 which requires substantial capital expenditures and probably will not be economical.

Increased productivity is never free, and I cannot imagine why any economists would believe otherwise.

Scott Sumner writes:

June sounds about right to me---but I consider my self a pessimist.

another bob writes:

I am a management consultant with four customer companies. During 2008 and 2009, each postponed new product development, new marketing and new systems and capital acquisition to support same. Each laid-off a significant percentage of their workforce. Most of the lay-offs were over 40 years of age and over $100k/year salary. These were the folks who planned and designed the next generation of products, introduced those products to new or existing customers and implemented new systems and infrastructure.

Without these folks, the existing capabilities hum along just fine, for a while. In the aggregate, to economists, this looks like much lower cost and no reduction in current capacity so, big productivity gains as long as demand is adequate.

More and more, US job growth depends on the first derivative of the demand curve not it's absolute value. Offshore, lower cost labor, depends on the absolute level of output.

That makes me an optimist.

Alan Harvey writes:

Productivity in the current quarter is dramatically out of scale. Absurd, I think is the word. It involves production from a larger workforce ascribed to a reduced workforce.

It happens every time jobs are cut, and people always say it is because the current workforce is being worked harder. In fact, plant capacity is lower. People have more tools. Plus, other people no longer on the payroll contributed time and talent to the plant, systems and products that are credited to the cut-down work force.

The proof is that the longer term action is in exactly the opposite direction. Productivity goes up in the medium and long term when the unemployment rate goes down.

I don't know if this comment function takes links, but here is the chart: http://2.bp.blogspot.com/_PusdiXNNmgs/StgX-pGtnZI/AAAAAAAAAXs/FLI76dFAyjA/s1600-h/Prod+v+Unemployment+Web+Site.jpg

Brick writes:

On productivity there is no one answer fits all businesses.For some businesses as was pointed out in comments above the only option to increase productivity is to invest in people and machinery. For many businesses you can increase productivity by adjusting costs, reorganising work flow, investing in software and machinery and effects started now tend to have lasting effects for about a 3 year timeline. More worrying is the fact that future product development may have taken a hit over the last year, reducing the competativeness of businesses over a 5 year timeline.
There is an assumption in your ideas that corporate profits will eventually lead to investment in jobs, machinery and busines expansion. I am worried that you are ignoring the fact that due to low interest rates share holders will look for a better return on their money. In effect share holders will start to shop around for high dividend payments forcing corporations to transfer those profits to share holders rather than into expansion.
It wont last forever but over a 3 year timeline I don't see a rapid rise in jobs or more importantly wages. There will be some notable exceptions where holes have been left in the markets for others to fill, but I think it is important to state that corporate profits don't change the economy, wages do and the lead time between one feeding through to the other can be a long time in a low interest environment.

Kenny Evitt writes:

I have a good example of 'organizational capital' that came to mind as I was reading this post. {Sorry for not using the trackback – Blogger doesn't support them (yet?).}

My (short) career has been mostly focused on supporting line-of-business applications with mostly small-businesses as customers. I can attest that there is a huge amount of productivity growth waiting be unleashed through better business software. I predict that at some point (next 50 years?), nearly every business will have at least one internal programmer.

Steve Roth writes:

Arnold, you keep using that one-line Garett Jones tweet as the foundational basis of arguments. But you've never discussed the statement, or the evidence (preferably empirical) for and against its accuracy.

Solid discussion would be much appreciated by those of us who don't have the wherewithal to dig through it ourselves.

Steve Roth writes:

For instance, this seems a propos:

http://moneywatch.bnet.com/economic-news/blog/maximum-utility/what-causes-employment-to-lag-output-in-recoveries/243/

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