Current presidential administration and today's economics.

[Maeglin]

*Originally posted by AZCowboy *
**Sorry, Maeglin, I missed your post.

Do you have anything objective you can point to that supports your theory?

All indications I have seen show that the rate of technological change continues uninterrupted, and productivity gains, while taking a bump in 2001, have returned to late-90s levels. **

Yeah, of course. A brief google search points strongly in this direction.

From this article:

During the 1990s, it seemed the tech-fueled economy would grow so fast that the U.S. could afford both rising consumption and whatever defense spending was deemed necessary. And firing up much of that growth was a sharp rise in productivity: From 1995 to 2000, productivity growth averaged 2.5% annually, about a percentage point higher than the 1.4% productivity pace from 1975 to 1995.

Indeed, there’s growing consensus among many economists that the U.S. can now sustain productivity growth of about 2% annually. That’s below the super-charged productivity rates of the late 1990s. But the good news is that 2% is faster than the sluggish years of the 1970s and 1980s. “That’s better than it was before the boom,” says Cynthia Latta, chief U.S. economist at DRI-WEFA, which is forecasting a long-term productivity growth rate of around 2%. Indeed, that’s almost exactly the long-term historical productivity growth rate of the past 50 years.

Similarly, within the Federal Reserve, policymakers from Chairman Alan Greenspan on down are convinced that the productivity pickup is real and will continue, though perhaps not at rates that prevailed in the late 1990s. Some top officials and economists at the central bank say in private that annual productivity growth from here on out will be roughly 2%. Greenspan, for his part, seems certain that there are plenty of efficiencies to be gained from the further application of information technology. But like some of his central bank colleagues, he seems unsure whether the resulting productivity growth will be up to the supercharged standards set in the late '90s.

Even Robert J. Gordon of Northwestern University, the leading skeptic of the New Economy, has acknowledged some productivity improvements. In an April, 2001, paper, he found that underlying “structural” labor productivity growth had jumped by 0.9 percentage points in the second half of the 1990s. Subsequent revisions of the data knocked that gain down to about 0.5 percentage points, in line with the consensus view. But Gordon cautions strongly that all of the productivity improvements came from the rising use and production of computers. Thus, in his view, if the tech slump continues, much of the productivity growth gains would evaporate.

There are more positive remarks towards the end of the article about how productivity can be sustained, but they are quite speculative.

All sorts of interesting productivity data from 2001 can be found here. I couldn’t possibly duplicate it in this post. Here’s a morsel:

Indeed, the reversal of the extraordinary productivity gains posted during the late 1990s is turning out to be much more abrupt that originally estimated. A month ago, following a relatively robust GDP report showing a 2 percent growth rate in the first quarter, non-farm productivity was estimated to have fallen by a relatively mild 0.1 percent. Since then, however, the government has shaved its growth estimate to 1.3 percent, meaning that less output was generated by a given labor input. What’s more, in re-tabulating its productivity findings, the Labor Department discovered that labor worked more hours than originally thought, owing mostly to a revised boost in the self-employed work week.

The net result was disconcerting. Instead of a relatively mild 0.1 percent drop in non-farm productivity, output per hour slumped by an annual rate of 1.2 percent, the steepest decline in eight years. By itself, this meant that businesses had less of a cushion of offset costs than before, underscoring the squeeze on cash flow. But to make matters worse, workers were getting fatter pay raises, leveraging the tight job market in effect until recently. Hence, on top of the 1.2 percent drop in productivity, companies saw their compensation costs jump by 5.1 percent during the first quarter. That combination resulted in a sharp increase in unit labor costs, an increase that was revised from an already uncomfortable 5.2 percent estimated a month ago to a startling 6.3 percent based on the latest numbers.

There’s optimistic news out there, to be sure. As long as companies can continue to cut costs, globalize, and deregulate, we can maintain solid productivity growth. But I find it difficult to view the spectacular growth of the late 90s as anything but cyclical. But capital is slumping, and in a world of contracting demand, ratcheting up productivity with only input is not going to yield spectacular results.

[AZCowboy]

OK, thanks.

But like I said, 2001 was definitely a dip, but 2002 returned to levels close to 5%.

According to the Bureau of Labor Statistics:

Business sector productivity increased 4.8 percent when the annual index for 2002 was compared with the annual index for 2001 (table B). This was the largest annual productivity gain since 1950, when business sector output per hour increased 8.5 percent.

It appears to me that the reports of the death of productivity increases are greatly exaggerated.

[Maeglin]

It appears to me that the reports of the death of productivity increases are greatly exaggerated.

To be fair to both sides, the time frame isn’t really large enough to tell. Considering the span is only about two years and the 2001 dip was pretty serious, I think we won’t really know until the dust settles on the New Economy.

Truce?

[pantom]

AZCowboy, those tax rate reductions were because of the inflation adjustment passed under Reagan. They had zip to do with Clinton. Each year the brackets get adjusted up, and the standard deduction is expanded, to adjust for inflation. That’s number one.
Number two, you’re addressing the distribution of taxes over all taxpayers, which is a different issue from the one I’m addressing, which is the overall tax burden. As you yourself noted, that tax burden rose to its highest level ever in the late Nineties. You’re correct that this was mostly due to the expanding economy. However, a piece of that was due to the raise in rates pushed through under Clinton. My contention is that if you look at the receipts in the first half of his administration, before the economy and the stock market really took off for the Moon and beyond, the effect that you see is mostly due to the raising of rates. If you look at 1996, the last year I cover in that table I posted, it shows that tax receipts rose at a rate about 17% greater than the increase in GDP, a considerable drop from the far more rapid rises in relation to GDP of 1994 and 1995. This shows, I believe, a “control” year, that is, a year in which taxes remained stable as the economy expanded. Thus, a 17% greater increase in receipts than the increase in the GDP is what you would expect from the effects of a greater income that is inevitably taxed at a higher rate because of the progressive tax schedule. This is well below the 50 and 40% greater increase in receipts in 1994 and 1995. So the majority of that increase in receipts in those years is explained by the raise in rates for high income taxpayers.
Clinton himself explained his raising of the rates on high income taxpayers as a way to close the budget deficits of those years. It worked. My contention is that it was also, by coincidence, perfectly timed to stretch out the economic recovery that was already taking place.
If you make a recovery take longer, this has the interesting effect of allowing the workforce to increase its skills because it is employed, in the aggregate, more than it would otherwise be, and therefore gains experience. That experience translates into productivity gains. Much is made of technology, as you have noted, but I believe this effect is grossly understated and underestimated: if people work more, they gain more experience, and as they gain more experience, they work better and become more productive.
Also, as labor conditions tighten, businesses respond by making their work practices more efficient. My personal belief is that this dynamic turned into a powerful feedback loop in the late Nineties, partially because the tax increases in the first half of the Clinton administration slowed down the recovery and made it last longer than it otherwise would have.
Sorry for the length.