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?


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.


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?

Demand & Productivity

In “The Great Productivity Puzzle”, John Cassidy writes:

More worrying is the fact that slow productivity growth has now persisted for almost a decade, and that this development hasn’t been restricted to the United States. Something similar has happened in countries like Japan, Germany, France, and the United Kingdom. Whatever is driving the slowdown in productivity growth appears to be affecting the advanced world as a whole. What is it?

One possibility is:

The bigger issue is that many corporations aren’t seeing enough demand for their products to justify large new investments. And even when they do see an uptick in demand they hire new workers who have to make do with existing equipment. So employment growth looks healthy, but the economy remains stuck in a low-growth, low-investment, low-productivity trap.

If this is what’s happening, there isn’t anything wrong with new technology, or the economy’s capacity to grow: the issue is how exploit its potential. If higher demand could be sustained, perhaps through a fiscal or monetary stimulus, firms would step up investment, and the economy would return to a more virtuous circle, in which higher rates of productivity growth and G.D.P. growth reinforced each other. This is basically what happened between 1945 and 1973.

In the same vein, Bernanke writes:

On the other hand, as mentioned earlier, the recent decline in productivity growth (and thus in potential output) has been both large and mostly unexpected. Some have hypothesized that this decline is not purely exogenous but has been influenced, to some extent, by short-term economic conditions. For example, the slow recovery from the Great Recession likely impeded capital investment, business formation, and the acquisition of skills and experience by workers, which in turn may have contributed to the disappointing pace of productivity gains. The converse possibility, that stronger economic growth today might have positive and lasting effects on the economy’s ability to grow, is for some an argument for erring on the side of more stimulative policies.

The charts provide an illustration of the importance of the stability and growth level of demand (NGDP) for the productivity growth outcome.

Demand & Productivity

Update (Aug 11) Kocherlakota pitches demand:

What to do? When faced with a decline in productivity, economists typically offer so-called supply-side solutions, such as lowering taxes or eliminating regulations. It’s important to recognize, though, that policies aimed at stimulating demand might be able to help a lot.

Suppose, for example, that macroeconomic policy choices convinced businesses to expect faster growth in the demand for their goods and services than they currently do. Companies would react by investing in more physical capital, and in the innovation needed to make that capital (and the people who work with it) more productive.