Is Larry Summers Getting Ready to Ditch Secular Stagnation?

He starts with the puzzle that employment and measured productivity growth have both been weak. If we are replacing less-skilled workers with machines and more-skilled workers, then why isn’t labor productivity going up?

This leads Summers to suggest that labor productivity is going up, but this is not being captured in the productivity statistics.

I am struck that there is likely what may well be an increase in unmeasured quality improvement. To take the first example that comes to mind and I’ll do an experiment with this group. I’ve done this experiment with other groups – which would you rather have for you and your family, 1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices? How many people would prefer 1980 healthcare at 1980 prices? How many people would prefer 2015 healthcare at 2015 prices?

There are a fair number of abstainers but your answer was pretty clear. What does that mean? That means that healthcare inflation was negative from 1980. That is very different than the 6% or so that is reflected in the
national income accounts.

Again, thanks to Mark Thoma and Tyler Cowen for pointers.

My thoughts:

1. Since people do not face health care costs directly (with their own money), perhaps this is not a fair question.

2. What about Hansonian medicine?

3. And yet, I agree with Summers on this. I certainly would prefer today’s health care at today’s prices. One of the first points I made in Crisis of Abundance is that we could afford to give everyone in the U.S. the health care of 1970. The main reason we are spending more on health care today is that it is more capital intensive and more specialist intensive. (Incidentally, I predicted when Crisis of Abundance was published in 2006 that its relevance would last a decade. I am now confident that it will be relevant even longer.)

4. Ask Summers’ question about higher education. Would you prefer a 1980 college education at 1980 tuition or 2015 college education at 2015 tuition? Personally, I see no reason to choose the latter.

In some sense, it does not matter whether Summers’ point is valid. Productivity has been been going up quite well in manufacturing and in some other sectors (e.g., Walmart). However, labor is shifting to the New Commanding Heights sectors. Maybe productivity is rising in those sectors and inflation is over-stated, or maybe they suffer from Baumol’s cost disease and there is no overstatement of inflation. Either way, once we ditch the GDP factory and disaggregate the economy, the productivity puzzle goes away.

Summers points out that if you take the view that inflation is lower than what is measured, then real interest rates are higher than typically measured. This is not good for his previous views on secular stagnation, as he points out:

to be fair [it]has an implication for views that I and others have expressed about secular stagnation, at one level you can say, well real interest rates really aren’t that low once you subtract inflation. Once you subtract properly measured inflation, there has been less of a decline in real interest rates than we thought.

And what if we think about a disaggregated economy, with deflation in some sectors and inflation in others? Does it even make sense to talk about “the” real interest rate? Obviously for a business, it is the rate of price change in your sector that matters. For a household, you care about some average rate of price change, but which average? My girls are done with schooling, so do I care about college tuition changes? Does it matter to me whether health care inflation is overstated or not, given that my only option is to purchase health insurance at current prices?

“Secular stagnation” is anachronistic, AS-AD, GDP-factory thinking. We are in a specialized economy. Eventually, otehr economists are going to come around to PSST.

17 thoughts on “Is Larry Summers Getting Ready to Ditch Secular Stagnation?

  1. “Personally, I see no reason to choose the latter.”

    Oh, I’d certainly take the 1980 education at 1980s prices (which is what I experienced as an undergrad). My kids, going to the same schools that my wife and I did, even took some of the same courses with the same damn course numbers. I don’t have any reason, for example, to think that Freshman Calc 115 has improved (or even changed) in any meaningful way in the last 30 years. Obviously, it is vastly cheaper and easier to learn independently now with content on the Web, of course, but I don’t see that this has improved the university classroom experience at all.

  2. I would be fine with 1980s healthcare at 1980s prices unless and until I needed something newer. It is highly likely I never will, nor would most. Both the improvements and the expense benefit the few, even when it benefits them greatly. The principal benefit of 2015 healthcare at 2015 prices is what else are you going to spend the money on?

  3. A survey answer will likely reflect the population answer that gave us both prices, which may be wrong.

  4. However, labor is shifting to the New Commanding Heights sectors. Maybe productivity is rising in those sectors and inflation is over-stated, or maybe they suffer from Baumol’s cost disease and there is no overstatement of inflation. Either way, once we ditch the GDP factory and disaggregate the economy, the productivity puzzle goes away.

    Exactly. My view is that labor force re-equilibration in the direction of Baumol-stagnating, low labor productivity growth service sectors is an almost mathematically inevitable consequence of differential rates in the growth of output per man-hour.

    My question is what kind of presentation would you consider adequate or compelling in terms of demonstrating this relationship?

  5. If insurance is insurance, I’ll take 2015. If insurance is welfare me and the government will take 1980.

  6. It’s true that tuition is out of control, but I’ve been educated since the early 00’s by MIT, Berkeley, Stanford, Harvard, Yale, and others through their open learning initiatives. I got my degree in the early 90’s from a decent state school, and I would say that it is a better education that students get at Ivy league schools. In addition, most of the classes I watch are in technical subjects, many of them either not invented by 1980, or not perfected by 1980. For example, on MIT OCW there is a class on channel coding, and Stanford has classes on convex optimization. Neither of those classes could have been taught in 1980.

  7. In that case, I think PSST needs to explain the intervening periods of relative stable growth.

  8. 1) Most employer based systems are putting a lot more on employees so your point on insurance is diminishing.

    2) How much is productivity limited by the Developed World Baby Bust. If we have less consumers and workers than we are not maximizing economies of scale. (For instance the high point of European good sold was in the 1990s.)

    3) Long term rates are not going up very fast. The Great Recession even lowered oil prices.

    4) How much is falling IT investment amounts increased productivity.

    5) The US economy unemployment is at 5%. Since the biggest drop has been 16 -24 workers, how do you suggest getting more in the workplace? Do you argree we are not producing enough welders? (I do know their is growing shortage of diesel mechanics and truck drivers.)

  9. I wonder how much of the labor productivity number isn’t driven by outside forces lowering the productivity of firms, such that moving to more capital and higher skill workers is necessary just to keep up. Local issues like health care mandates, increased difficulties in hiring and firing and other regulations could make productivity drop while causing employers to shift practices just to keep up. Similarly, the drop in international trade might be causing drops in productivity that are merely being counter acted by efforts to improve it. (The drop in trade and the flat lined productivity might both be symptoms of the problem of productivity killing regulations as well.)

    I don’t know a lot about the issue, but it seems that there are lots of degrees of freedom around the problem of productivity flat lining, and no one change should really be expected to dominate.

  10. This comment is less about your post and more about PSST. I recently saw a paper by Garin, Pries, and Sims that sounds like PSST.

    An excerpt you may like: “If recessions are increasingly about reallocation, then this raises the question of how aggressive countercyclical demand management policies should be. Stimulating demand through aggressive monetary easing or fiscal expansion may only serve to postpone the necessary reallocation of resources; it could also have longer term adverse consequences concerning
    productivity growth and human capital accumulation.”

    Source: http://www3.nd.edu/~esims1/gps_june27_2013.pdf

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