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Friday, October 13, 2006



The facts seem consistant to me. Countries keeping assets in dollars to maintain employment there, a debt fed spending binge, and productivity high because income growth is low since so few jobs are created here.

Arthur Eckart

I think the relationships make sense. A) Larger trade deficits increase competition, e.g. through cheaper imports or a stronger dollar, which force U.S. firms to become more productive. B) There's an inverse relationship between profits and wages. Much of the gains in productivity have gone into profits. C) Large current account deficits slow economic growth and may invert the yield curve. Also, current account deficits are offset by capital account surpluses, i.e. greater foreign capital inflows, into long Treasury bonds. Also, I may add, the U.S. housing boom, that started in the mid-90s, along with related goods, contributed a great deal to domestic output. Moreover, U.S. automakers had zero percent financing in the early 2000s, which resulted in more domestic auto sales than ever before. Furthermore, there's been Wealth Effects in the U.S. housing, bond, stock, and commodity markets, etc.


The significant upward revision to the payrolls data tells us the US was using much more labour input than previously thought, for a given output, supporting the notion that productivity figures may need to be revised lower.


Eckart : "... Larger trade deficits increase competition, e.g. through cheaper imports or a stronger dollar, which force U.S. firms to become more productive."

If the deficit has not resulted from imports that destroy local production, in which case there is no possibility whatsoever for the firms to become less productive.

This has essentially happened to the plastics industry. The productive capacity of this industry (innovated in America) was strong in post war years up to the '80s, when it came apart at the seams. The industry remained labor intensive and to compete it started shifting production first to Mexico and, when that pricing could not maintain market share, to China.

In the small town of Leominster, in Central Massachusetts, is the "Plastics Museum". This old school house, in a popular neighborhood, reconverted into a museum shows the progress of the plastics industry in this small community which, at its apex, was the global center of plastics production. Plastics was a powerhouse of the American community. (Tupperware was founded here and production of its products lasted in Leominster up to the '80s.) In the rest of Leominster, however, is the testimony to dislocation. Large buildings that once housed plastic companies now lie abandoned.

It's a dismal site.

Ian D-B

Oh boy is Dean Baker wrong on this one. Fantastically wrong. His results are based on the idea that you should be deflating output by one deflator but conpensation by another. for some reason, the fact that investment goods are relatively cheap doesn't matter to how people value their income. But it certainly matters in that it raises returns to investment, which in turn raise returns to saving, which in turn raise the real value of compensation. I've had other people email me Baker's argument, and it strikes me as completely and utterly wrong. GDP is both output and income. It is idiotic to say we're going to deflate output one way, but income another, and therefore there is less "usable" productivity growth.

Mandel doesn't mention all of that though. he does mention the depreciation numbers. I have yet to look closely at them, but they worry me. The changes are enormous. And it's unclear to me how they actually would be reconciled with a full equilibrium in which depreciation is factored in to the price of investment goods. I think there are a lot of problems with productivity right now (it's scary when capital deepening is due to a decline in employment rather than a rise in capital), but this arcana about depreciation rates and deflators is not only trivial, but wrong.

Arthur Eckart

Ian: "it's scary when capital deepening is due to a decline in employment rather than a rise in capital"

It's possible U.S. firms are using capital more efficiently. Throughout the '90s, investment increased from 17% to 21% of GDP. So, it's possible there was excess capacity, given many believed the high-tech bubble reflected a "new economy." The Creative-Destruction process helped lower investment to 18% of GDP. Currently, investment is 20% of GDP. Also, over the past three years, the U.S. unemployment rate fell from about 6 1/2% to 4 1/2%. I suspect, high-tech goods are more durable, although depreciation rates are unchanged (for example, how many really need to upgrade from 64-bit processors?). So, time intervals of upgrades may be longer than the '90s. Also, high-tech investment costs may be lower, which you noted.


Eckart: "It's possible U.S. firms are using capital more efficiently. Throughout the '90s ... The Creative-Destruction process helped lower investment to 18% of GDP."

Let's remember the biggest fiasco in telecoms history before we believe this hype. Remember the thousands of miles of fibre optics that was put down in the mid- to late-nineties in order to pave the way for increased internet usage that was supposedly "doubling every 90 days"? Never happened. (But, could still.)

Remember 3G telephony that would make us all ambulant telephonists, emailers and Internauts? Never happened. (But, could still happen.)

Let's NOT attribute to capital the advance in productivity brought about by technology - because we don't know how that technology is being employed. It is entirely possible that companies got more productivity by better exploiting existing technologies to produce more. The increase in capital usage could simply be to expand output capacity, but employing technology that was already proved elsewhere.

Besides, I can count numerous examples where New Technology has been developed and introduced FIRST outside the US. Take GSM as an outstanding example. Take Linux as another. And much of assembly-line robotics.

For all the techy bells and whistles that you see in Hollywood films, new technology applications is NOT a mainstay of American production capacity, which is anchored in methods and processes developed pre-WW2.

Look at any assembly line in America and tell me where the New Technology (that is manufacturing applications implemented AFTER the early nineties) was involved. There is damn little.

That same technology is there today, for instance, churning out cars that Americans do not want to buy from Detroit. Those assembly lines have been robotized, where possible, for more than fifteen years. And, if car manufacturing is no longer competitive it is due to the cost of labor factor input, but not the lack of technology. Now, apply this logic to white goods manufacturing ...

Productivity per se is NOT well understood and it is NOT due to one factor alone, that factor being Technology. It is a complex phenomenon of myriad mechanisms working to make production more efficient. It really deserves a well-executed study at the microeconomic level.

More so: Take any manufacturing line and account for the components that actually come from abroad. You will see why American productivity has had such tremendous gains. It is the only way to keep manufacturing in situ and in America - and it is very largely overlooked.

What holds American manufacturing back is the old adage, "If it aint broke, don't fix it." And, above all, don't replace it. So, when cheaper components started arriving into stateside markets from abroad, they swamped small-component shops, which quickly died.

Nobody saw it coming. Nobody did anything about it (at a national level). And everybody is lamenting the fact that those jobs are gone forever.

Of course, New Technologies are going to replace all those jobs, aren't they? Or, maybe not ... 8^(

Sorry to be the Cassandra, but for all the hype about Technology in America, I have the sneaky suspicion that most of it is just smoke.

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