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January 30, 2006
A Good Word for Greenspan
I write an appreciation of Alan Greenspan in my BW Online column this week. The piece starts off:
I'm sorry to see Alan Greenspan go this week. Despite his age (almost 80), he was and still is one of the few economists who truly "gets" technology. The economics profession, by and large, thinks of technological change in simplistic terms, as a new machine tool or a faster computer. But Greenspan understands that technology is a dynamic, unpredictable, and transformative force that requires a different way of looking at the world.
The column continues here.
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Mike, why would productivity changes driven by software not show up in the official statistics? If I acquire software that displaces order-entry people, it should show up in labor productivity. If I acquire software that will reduce the need for inventory, it should show up in capital productiviy.
What am I missing here?
Posted by: David Foster at January 30, 2006 08:35 PM
I agree. We need more people who understand the nature of technology on economics, in order to do a better service to those who depend on economists.
BTW, here is an awesome post on historical economic growth :
Posted by: Kartik at January 30, 2006 09:19 PM
Actually, it is here :
Posted by: Kartik at January 30, 2006 09:22 PM
Greenspan was correct. Economic tools for measurement and prediction are completely inadequate for the "new economy". In fact, I would say you can fairly extrapolate this to say that every time the economy changes, existing tools are faulty. If the tools haven't changed in decades, yet the economy has changed continuously, then how faulty do you suppose the existing tools are?
What's more, I would expect that particular tools are geared to a particular market structure. I've discussed market structures before; they are all legal constructs no matter whether you call them "free markets" or "socialist markets" or your favourite descriptor of the day. When the legal constructs change, the market becomes a different trading environment, but the existing tools don't change to reflect that new structure.
So perhaps the productivity measures can not adequately gauge the productivity increases in the economy. Or, at least, that was/is the belief. There are a couple of arguments here. The first is that the productivity levels really have increased substantially thanks to technology (say, software). But one could also argue that businesses are more productive and see better bottom lines because technology replaces employees (e.g. one employee with software can now do the work of two employees 8 years ago) but that the productivity of the society may not have increased because displaced workers move to less productive roles. In this case, Greenspan is told by business leaders that productivity is way up; and it is, for the businesses. So he pulls the levers of economic policy based on the notion of accelerating *societal* productivity, when in reality, societal productivity may actually be stagnant or decreasing.
Posted by: Brandon at January 31, 2006 09:30 AM
Interesting thesis Brandon, but unfortunately it is way wrong. For instance, if we have a widget factory of that employs 2 workers and makes 10 widgets a day. A new technology is introduced that allows the factory to make the same amount of widgets with only 1 worker, total societal productivity hasn't changed. It is still 10 widgets per day. Then lets say, worker #2 is laid off, and decides to become a widget accessory maker, and he is able to make 2 widget accessories per day. Total societal productivity now is 10 widgets + 2 widget accessories, which by definition is greater than 10. So, therefore there is an absolute increase in "societal" productivity and an increase in widget productivity. Therefore, because of this society as a whole is better off.
Now, where you may be confusing yourself is that worker#2 is not better off, as maybe widget accessorizing does not pay as well as widget making, but worker#1 most certainly is and society as a whole is as the production possibilities frontier has expanded. Productivity increases do create losers in the short-run but in the long-run society as a whole is better off.
Posted by: Nathan at February 1, 2006 07:10 PM
I think Brandon has identified a key issue, but it can cut either way. There are a lot of people in this society--ranging from R&D engineers to homemakers--whose work is not included as part of GDP. So if a company hires more R&D engineers, measured productivity will fall.
Posted by: Mike Mandel at February 2, 2006 07:49 AM
So Brandon, what do you think about this analysis:
"The declining productivity of workers and wage inflation is a threat to the economy. This caused the stock market to decline today (2/2/06). This will compel the fed to continue to raise short term interest rates. And of course we know that this will do nothing to help the housing market. Adjustable rates and mickey mouse loans will sink many people in the USA. The chance of deflation looms over us. Greenspan has left Bernanke very little wiggle room here."
Posted by: Gary Anderson at February 2, 2006 08:52 PM
The analysis basically states that economic measurements are going to make the Fed raise rates which will sink the housing market and cause deflation.
Since the market and economy seems so drastically disconnected from anything the Fed does anymore, I wouldn't make much of the analysis.
Maybe it's just a statistical anomoly, but my thoughts on the "declining productivity" are simply that the U.S. worker is burned the-hell-out from busting their backsides for declining *real* wages. Hitting this productivity barrier employers are forced to finally hire people instead of dumping more work on existing employees and demanding more quantity from them. To get the better people, they finally have to increase the real wages they're paying after 5 years of not doing so. So perhaps we have a 1 quarter uptick in wages, but when you've spent 20 quarters with relatively stagnant - or declining - real wages, a little uptick isn't exactly "inflation".
Posted by: Brandon at February 3, 2006 10:05 AM
It is a little inflationary blip compared to deflationary pressures on wages, I agree. However, lots of people are worried about it and are now saying that the fed will raise in March and May rather than just in March. Thanks for the response Brandon.
Posted by: Gary Anderson at February 4, 2006 10:28 PM
Alan Greenspan has some traits that are common in great Leaders ; the ability do craft a vision. They are able to share a dream and the direction that other people want to follow. True leadership vision goes beyond written organizational mission and vision statement. The vision of a leader is all over the organization and is manifested in the actions, beliefs, values and goals of its staff.
Posted by: Henrique Pl?ger Abreu at February 14, 2006 07:02 AM
That's very true about Greenspan's vision, and that's one of the things Bernanke will have to deal with..an institution which has been molded to a great leader.
Posted by: Mike Mandel at February 14, 2006 08:04 AM
Here is a little update Brandon. We are now in deep doodoo now that Bernanke continues to rise and even lying Lereah is now concerned about the falling prices of his condominium investments. The party is over Brandon. The housing bears have won and the Greenspan boot lickers are agonizing in defeat.
Interest rates too low for two long created a bubble and inflation at the same time. The fed has chosen to attack inflation and the people who bet on real estate could be facing one of the largest bubbles of any kind anywhere for maybe the next 6 years. Flipper hell I call it.
Posted by: Gary Anderson at June 24, 2006 11:43 PM
Let's see..., Greenspan left office in late February 2006 and the GDP was 5.5%. I guess he left when at the right time.
Today, through June 2006, GDP was 2.5% and I bet next quarter it will be closer to 1%. Yes, my
industry, real estate has been the first to suffer; and if you look to the northeast near Boston, high taxes and negative appreciation will make for a bad Christmas holiday. Everything changes, and this will be better than most believe. 3 years from now these prices will be bargains from a buyer's perspective.
We've had one quarter of marginal growth and higher mortgage rates; I dare anyone of you to ask
someone from Tokyo what life was like during the entire 1990s? Your perspective will soon change.
Moreover, some of us have lost friends in their 40s, 50s and 60s to cancer. Enjoy what you have, and be grateful for what you've earned.
Posted by: Frank Drake at July 29, 2006 02:50 PM