James Pethokoukis cites, without providing a link, a recent claim by Goldman Sachs economists.
If our ballpark estimate of a 0.7pp understatement of annual GDP growth is close to the mark, the measured growth pace over the past five years of 2.2% might correspond to a true growth pace of almost 3%. This would be closer to the pace one would expect given the pace of improvement in most labor market indicators over the past five years.
They think that inflation is overstated, and therefore real output and productivity are understated. The official estimates face several well-known problems, including:
1. For some products and services, quality change is difficult to measure. The statisticians’ estimates of quality improvement tend to be biased in the direction of zero. I’ll bet, for example, that if you were to look into medical care data in the GDP accounts in detail, you would find a lot instances in which quality improvements are mis-classified as cost increases, and almost no cases of the opposite.
2. The process of aggregation is problematic, because people shift their consumption in response to price changes. If college tuition goes up and people switch to using YouTube, it is not clear how to measure the change in real consumption of education services.
3. The nature of inputs changes. To any business, the differences in skills and characteristics of workers matter. In the aggregate productivity statistics, an hour of labor is an hour of labor. There are similar problems with aggregating capital and aggregating output.
You know I don’t like anything that smacks of treating the economy as a homogeneous GDP factory. But if you do think in those terms, then I am inclined to agree with the Goldman folks. The aggregate measures show the GDP factory becoming more and more profitable, even with rather slow growth in revenue (nominal GDP). To get that, you need productivity growth to be better than wage growth. And, yes, that means that an implication of the Goldman view (and mine) is that the people who complain that labor is not getting its fair share would have more fuel to feed their complaints.
It means that real interest rates have been higher than they appeared to be. So does that mean that the zero bound was more binding than we thought? But we got higher growth than we thought??? I think that, on balance, this is bad for people who harp on the zero bound, but my biases have always been against that viewpoint.
Meanwhile, righties, it also means that people who think that there must be inflation going on somewhere, because the Fed is such a wicked institution, are not correct. I expect to get a lot of push-back on that. For those of you who want to use asset prices as your measure of Fed profligacy, you may have a point, but that is a different story as far as I am concerned. For those of you who are new to this blog, I subscribe to a “consensual hallucination” theory of low to moderate inflation. That is, people just operate as if prices are going to keep doing what they have been doing. On the other hand, I subscribe to the fiscal theory of hyperinflation. You get big hyperinflation when, and only when, the government is deficit-spending so much that it can no longer finance its deficits with low-cost borrowing.