EC The Puzzle Of The US Productivity Slowdown

In the long run, the average standard of living in an economy is determined by the average productivity of its workers. For example, Paul Krugman started Chapter 1 of his 1990 book, The Age of Diminished Expectations, by stating: "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

Thus, it matters a lot that US productivity growth slowed down back around 2005, even before the start of the Great Recession, and that we don't really understand why. The Congressional Budget Office laid out the issues in its recent report The Budget and Economic Outlook: 2019 to 2029 (January 28, 2019). CBO pointed out that productivity growth--which it refers to by its more formal moniker of TFP for "total factor productivity"--seems to be higher or lower for periods of some years, with abrupt transitions between these periods.

"Over longer periods, however, years of comparatively steady TFP growth tend to be followed by rather abrupt transitions to years with steady but substantially different growth. For example, estimated trend growth in TFP remainedrelatively strong in the 1950s and 1960s, slowed considerably from the early 1970s to the mid-1990s, and resurged in the late 1990s and early 2000s. Around 2005, a few years before\ the recession and financial crisis that began in 2007, TFP growth again slowed in many industries and throughout the international economy. In CBO’s estimate, TFP growth in the domestic nonfarm business sector was only about one-third as rapid during the 2006–2017 period as it had been from 1996 to 2005."

In the aftermath of the Great Recession, CBO has been scaling back its productivity forecasts. The top line shows the CBO productivity forecasts in 2012. The other lines show how the forecasts were reduced in 2014, 2016, 2018, and now in 2019.

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Gary Anderson 2 months ago Contributor's comment

I think the Fed is quite comfortable with slow growth. Williamson, former VP of the St Louis Fed seemed to be comfortable with it.

Kate Monroe 2 months ago Member's comment

I'm not clear on why slow growth is worse than no growth?

Gary Anderson 2 months ago Contributor's comment

Slow growth is better, but is what the Fed wants. It does give rise to anti slow growth populism and Trump.