productivity and economic growth in the election year and beyond robert j. gordon northwestern...
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![Page 1: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/1.jpg)
Productivity and Economic Growth in the Election Year
and Beyond
Robert J. Gordon
Northwestern University, and NBER
Presentation at Vanguard, March 15, 2004
![Page 2: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/2.jpg)
Forecasting Potential Output into the Future: Many Constituents
• Social Security: a 75-year Horizon
• Long-run Fiscal Policy: a 10-20 year Horizon
• Our Primary Focus Today: 20 years
• Global interactions
• Business investment decisions
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Why Is Projecting Future Economic Growth a New Topic?
• Everyone Projects Productivity Growth and Adds +1
• Social Security “Crisis” is Based on Adding +0.2
• What is the Right Approach to Thinking About Future Productivity and Output Growth?
![Page 4: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/4.jpg)
Long-range Forecasts Must be Based on the Past,
but How Much of the Past?
• Productivity growth: do we look at the last 3 years, the last 8 years, or the last 30 years?
• Comparing a very noisy series with a very smooth series
– The recent past of a smooth series might be enough
– But a longer historical interval might be necessary for the noisy series
![Page 5: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/5.jpg)
Can Pure Statistical Methods Handle Turning Points in Trends?
• Think of the mistakes we would have made making two-decade forecasts at these points in the past
– In 1963: forecasting population growth
– In 1968: forecasting productivity growth
– In 1995: forecasting productivity growth again
• Not to mention 1929 and 1945!
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For Long-range Forecasts, Our View of the Past Requires
Cycle-free Trends
• We don’t want a cycle hiding inside a trend, the disadvantage of the H-P filter for some variables
• We may need different trending methods for some variables and eras
• Important example: productivity growth in the 1930s, 1940s
![Page 7: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/7.jpg)
Hence We’ve Got to Talk About Cycles and Trends
Together
• Today’s points of departure:
– We want long-run forecasts
– For this, we need the past
– But we need somehow to filter the past to find out what is relevant for the future
– Horizon into the past and detrending method may differ for each variable
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Topical! Especially since August 7,
Profound Puzzlement about Productivity Behavior
• Labor productivity growth mid-00 to end-03 of 3.64% p.a. dwarfs the 2.56% of 1995-mid 00.
• Yet the 1995-2000 revival has been strongly linked to the ICT investment boom.
• How could productivity growth accelerate after ICT investment crashed?
• Could the core explanation of the productivity growth revival rest in something other than ICT?
![Page 9: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/9.jpg)
Organizational Tool for Both Cycles and Trends
• The Output Identity
• In its Simplest Form Makes Output Equal to the product of:– Productivity
– Employment Rate
– Labor-force Participation Rate
– Working-age Population
– Hours per Employee
• Hiding Inside the Output Identity are Numerous Useful Trend and Cyclical Relationships, including
OKUN’s LAW
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The Real-World Version of the Output Identity
(4) q = p + h + e + f + n + m + s
By themselves, these symbols are logs of actual values
With *, they are the trends of these variables
With ‘ , for each variable they are log ratios of actual to trend (x’ = x – x*)
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Potential GDP vs. Productivity: the Trend Story in Tables 1 & 2
• Potential GDP growth (Δq*) ranged from:
– 4.07 in 1963-72 to 2.69 in 1978-87
– Differences accounted for by
• Productivity (peak 1954-63)
• Population growth (peak 1972-78)
• LFPR (peak 1972-78)
– Offset by decline in hours/employee (peak 1972-78)
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What does the ProductivityGrowth Trend Look Like?
• No Matter What the Method, Agreement that
– Peak Growth in the Kennedy Years
– Slowdown from mid-1960s to late 1970s
– Recovery in early 1980s, mid 1990s, and a further recovery post-2000
![Page 13: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/13.jpg)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
H-P 6,400
Kalman filter without cyclical term
Kalman filter with cyclical term
H-P and Kalman MethodsPercent
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The Implications for Deviations of Actual Productivity Growth from
Trend
• Big Surprises
• So huge is the 2000-2003 Record that the Late 1990s Appear to be Below Trend
• My Contrition, tempered on Data Availability
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-5
-4
-3
-2
-1
0
1
2
3
4
5
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Kalman filter with
cyclical term
H-P 6,400
Average
![Page 16: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/16.jpg)
Okun’s Law: Where is the Remaining Procyclical Effect?
• Table 3: Peak and trough ratios of actual to trend
• Employment Rate 39, Productivity 38, Hours 24, LFPR only 5, other -7
• Differences over cycles (LFPR, productivity)
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-2
-1
0
1
2
3
4
5
6
7
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Actual and trend growthPercent
Actual
T rend
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•Log Ratio of Actual Real GDP to its Trend
-10
-8
-6
-4
-2
0
2
4
6
8
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
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Making a Long Story Short: Statistical Analysis
• Look at Figure 4, Compare Jobless Recovery of 1991-92 with that of 2002-03
• These are statistical residuals from the best possible attempt to explain the actual movements
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-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1985 1990 1995 2000
Aggregate hours
Output per hour with lags
Output per hour without
2000-03 EOE effect
Percent a year
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What Has Been Going onin 2000-2003?
• Residuals much larger than 1991-92
• Employment rate no offset
• The Unprecedented Deviation between the Household Employment and Payroll Employment Totals
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Why Did Productivity Growth Accelerate While
ICT Investment Collapsed?
• The Collapse of Profits
– NIPA vs. S&P
– Accounting Scandals
– Stock Option Compensation
• The Intangible Capital Hypothesis
![Page 23: Productivity and Economic Growth in the Election Year and Beyond Robert J. Gordon Northwestern University, and NBER Presentation at Vanguard, March 15,](https://reader035.vdocuments.us/reader035/viewer/2022062423/56649d3f5503460f94a18aa9/html5/thumbnails/23.jpg)
Six Reasons Why 2000-03 Productivity Growth
Should not be Extrapolated to 2023
• #1 The Early Recovery Productivity Bubble (see Table 8)
• #2 The Mismeasurement Hypothesis about Payroll Employment
• #3 Intangible Capital
• #4 For twenty years into the future, some weight should be given to 1972-95
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The Last Two Reasons
• #5 Jorgenson-Ho-Stiroh on Labor Quality– 1995-2001 0.38 percent contribution
– 2001-2011 0.16
– 2011-2021 0.02
• #6 Europe Lags Behind. Does This Tell Us Anything?
• Guesstimate, stats say 3.2 for 2004, how about a range of 2.25-2.75, centered on 2.5?
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Connecting the Past to the Future
• For Future Potential GDP Growth, we ignore employment rate, LFPR, and mix/employment measurement effects
• Focus on – Productivity growth
– Population growth
– Growth (shrinkage) in Hours/Employee
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Population Growth
• Fertility: “American Exceptionalism”. Reasons for it to continue– Hispanic immigrants
– Demographers and Phelps: Europe’s disfunctional youth culture
• Mortality: continued decline in death rates, but how fast?– Example of how far into the past we should look
– Rate 1995-2000 only ¼ of 1968-82
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The Wild Card: Immigration
• Figure 5: Continued Postwar Increase as Share of Population
• Growth Rate of Legal since 1970: 3.4%
• Trustee’s: absolute decline
• Only 1% growth rate in immigration will boost 2075 U. S. population from 415 million to 600 million
• Implies future population growth of 1%
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0.0
0.2
0.4
0.6
0.8
1.0
1.2
1900 1920 1940 1960 1980 2000
Legal immigration
Legal plus illegal immigration
Percent
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Adding it All Up, Table 11
• Let’s Work Through the Table
• Implications for Social Security
• Time Sequence of When this is Going to Happen
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Conclusions
• To project Potential GDP into the future, we need to understand the past
– How much of the past is relevant?
– Which movements of actual data in the past are reflected in trends, in “regular” cyclical movements, and residuals?
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The Two Jobless Recoveries
• The 1991-92 Productivity Bubble can be largely explained (EoE effect)
• The 2002-03 Productivity Upsurge comes out as a residual despite 3.1% trend growth
• Will this residual go away? (residual collapsed and changed sign in 1993)
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Translating the Past into the Future
• Six Reasons why 2000-03 Productivity Growth Won’t Continue
– Next two decades, 2.5% NFPB, 2.00% total economy
• Population and hours per employee add 1% per year
• Total implied potential GDP growth, 3.28% in contrast to 2.95% 1987-2001