Ed Yardeni And Scott Sumner

A Benjamin Cole post

Market Monetarist don Scott Sumner has indirectly responded to Ed Yardeni’s surmising that it is secular stagnation and weak demand that is causing the crummy U.S. productivity stats.

Sumner notes official unemployment rates have been falling, hard to square with sluggish AD causing schlumpy productivity.

But what if I told you Americans are working about the same number of hours in aggregate today as in 2007…and in 2000?

BC Productivity_1

For Q1 2016, the index of hours worked nationally in the United States private sector was 112.3. It was 110.2 in Q2 2007, and 109.2 in Q2 2000. That is 16 years of essentially no employment growth in the United States. There is plenty of capacity, even in labor, on the sidelines.

BC Productivity_2

And above is output per hour. It flat-lines after 2010.

So, as a nation, Americans are working about as many hours as 16 years ago, and output per hour has not risen much in the last six years.

Does that strike anyone as an era of robust AD?

Stagnant

The last 16 years sure looks like an economy limping along.

Maybe a surge in aggregate demand—helicopter drops, for example—would not boost productivity, and would only boost employment and total hours worked. Boy, what a terrible outcome!

Or maybe productivity is sluggish as labor is cheap. Employers just add some bodies on to meet the small increases in demand.

As a counter-example, if the U.S. eliminated the minimum wage, it is likely productivity would drop, even as employment surged. But aggregate demand could stay weak, even with the decrease in unemployment.

Conclusion

The truth is, aggregate demand is weak globally, which is why economies everywhere are waterlogged with capacity, especially China and Japan, which have built up exporting industries to service world markets.

If global aggregate demand is weak, does that not suggest a universal condition, such as tight major central banks?

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