Yes, the Great Stagnation is here

I’ve been arguing that 1.2% RGDP and 3.0% NGDP growth is the new normal.  The RGDP growth is of course an arbitrary figure, reflecting the whims of statisticians at the BEA.  But the NGDP slowdown is real (pardon the pun.)  So let’s not have any tiresome debates over angels dancing on a pin, or whether there is unmeasured digital “output.”

It seems like the experts are beginning to figure this out:

Productivity fell at a 3.1 percent annual rate instead of the previously reported 1.9 percent pace, the Labor Department said. That was the first back-to-back fall in productivity since 2006.

.  .  .

The productivity decline mirrors the economy’s dismal performance in the first quarter, when output contracted at a 0.7 percent rate.

Given that temporary factors contributed to the decline in output, the drop in productivity could be overstated and a rebound is likely in the second half of the year.

Still, weak productivity suggests that the economy’s potential growth could be lower than the 1.5 percent to 2.0 percent pace economists currently estimate.

“economists currently estimate”?!?!?  Not me.

Over the past 5 years, productivity has risen by less than 3%.  That might not seem so bad, except I’m referring to the total increase, not the annual increase. Again, get used to 1.2% RGDP growth; it’s the new normal, the new trend line. Within a few years I expect even the Fed will begin to catch on to what’s happening.

One slightly more upbeat observation is that RGDP growth will continue at 2%/year for a bit longer, but that above trend growth during this expansion will be given up in the next recession.

PS.  Today’s jobs numbers make the productivity situation even worse–don’t expect much bounce back in Q2 productivity.

PPS.  After I wrote this I noticed a comment by Justin with many similar points:

In the 5 years to April 2015, just shy of 12 million private sector jobs were created, an annual growth rate of 2.1%/yr.

For comparison, in the 5 years to December 2007, 7.1 million private sector jobs were created, a growth rate of 1.3%/yr and in the 5 years to March 2001, 12.3 million private sector jobs were created, a growth rate of 2.4%/yr. So from a job creation perspective, the current expansion is running much hotter than the Bush years, and just a bit slower than during the go-go years of late 1990s.

What’s the disconnect? Productivity. In the 5 years to 2001Q1, productivity grew 2.7%/yr, and in the 5 years to 2007Q4, productivity grew 2.4%/yr. Over the past 5 years, productivity has grown just 0.6%/yr. If productivity were growing as it had during the past two cycles, we’d be enjoying 4% real GDP growth, not 2%.



48 Responses to “Yes, the Great Stagnation is here”

  1. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2015 at 05:24

    Here’s the new robotic sewing machine:

    see all the angels dancing on the head of the needle?

  2. Gravatar of flow5 flow5
    5. June 2015 at 05:35

    Roc’s in M*Vt = roc’s in N-gDp. Follow the money. If you’re in charge of the money, then you should know something about it. Yellen should be fired.

    QE3 was a contractionary money policy.

    Some people can go fishing and they will see all the wild life around them. Others will miss the frogs, turtles, and the hatch on top of the stream.

  3. Gravatar of ssumner ssumner
    5. June 2015 at 05:50

    Morgan, Thank you for proving my point—everyone should look at that video. That sort of machine is included in the government’s RGDP estimates, and we still get very low productivity numbers.

    Flow5, That’s just a fascinating take on the productivity puzzle. I don’t think I’ve ever learned so much from reading a comment. Ray should take a look.

  4. Gravatar of collin collin
    5. June 2015 at 06:07

    Looking at the jobs report, I am starting to give up on productivity measurements. Why:

    1) The big boost of productivity in 2000 – 2002 was simply Michael Mandel’s off-shoring of jobs, etc.

    2) The big boost in 2009 – 2010 was the giant corporate layoffs and companies politely tell employed people to do more.

    3) Today what is what happening:
    a) Because of the giant layoffs of a couple years ago, companies don’t have ‘talent benches’ for most position. (Notice official corporate training is way down.)
    b) There isn’t anymore boost from off-shoring. In fact, a few positions are being on-shoring, with on hours work and on job training, that improving jobs and lowering productivity.
    c) Very productive workers for the current pay are now quitting and changing job for better pay with less production. (Aren’t the least marginal productive workers the one that switch positions within six months?)

  5. Gravatar of flow5 flow5
    5. June 2015 at 06:13

    Demand deposits were 77 percent of time (savings) deposits in 1959. They fell to 10 percent in 2008. It’s a damn shame. Commercial banks don’t loan out existing deposits, saved or otherwise. From the standpoint of the system, CBs create new money every time they lend/invest.

    The source of all time/savings accounts in the CB system is demand deposits, directly or indirectly via the currency route or thru the CB’s undivided profits accounts. I.e., with immaterial exceptions, all time deposits are the indirect consequence of prior bank credit creation. See: “bank credit proxy”.

    Secular stagnation, stagflation, or whatever, has multiple causes. But the principle demand side factor pulling down the economy is the non-use of savings. Commercial bank-held savings are lost to investment, consumption, indeed to any type of payment or expenditure.

    Bankrupt U Bernanke destroyed non-bank lending by (1) remunerating excess reserves (this gutted the NB’s wholesale funding in the borrow-short to lend-long savings-investment paradigm). Then the (2) FDIC further induced this dis-intermediation by offering unlimited transaction deposit insurance. And (3) the countercyclical increase in bank capital requirements sopped up a trillion dollars out of the money stock.

    If the Fed relies on just the Reserve and commercial banks in order to “prime the pump’, then it must offset the decline in non-bank lending. That will boost N-gDp, but will change its mix, the deflator will grow at accelerated rates relative to real-output (late 50’s prediction).

    I.e., monetary savings are impounded within the CBs, & unspent savings represent an unrecognized leakage (non-use), in Keynesian National Income Accounting procedures.

    If savings do not exchange hands (are a leakage), they exert a dampening, contractionary, or net deflationary impact on prices, production, employment, incomes, & in consumer & business confidence.

  6. Gravatar of flow5 flow5
    5. June 2015 at 06:27

    Yellen is pursuing an extremely tight monetary policy relative to 2014:

    Roc’s in money flows, proxy for real-output, are lower than 2014:

    1/1/2015 ,,,,, -0.027
    2/1/2015 ,,,,, -0.036
    3/1/2015 ,,,,, -0.037
    4/1/2015 ,,,,, -0.078
    5/1/2015 ,,,,, -0.088
    6/1/2015 ,,,,, -0.031
    7/1/2015 ,,,,, -0.092
    8/1/2015 ,,,,, -0.082
    9/1/2015 ,,,,, -0.04
    10/1/2015 ,,,,, -0.054
    11/1/2015 ,,,,, -0.049
    12/1/2015 ,,,,, -0.067

    Yellen should be fired.

  7. Gravatar of flow5 flow5
    5. June 2015 at 06:33

    Sumner you don’t understand economics. How can you teach it?

    Productivity doesn’t increase without investment. And investment isn’t encouraged without higher levels of AD.

  8. Gravatar of Mike Sax Mike Sax
    5. June 2015 at 07:04

    Can anything be done policy wise about productivity or is policy pretty much powerless?

  9. Gravatar of Sentences to ponder Sentences to ponder
    5. June 2015 at 07:09

    […] That is from Scott Sumner. […]

  10. Gravatar of Michael Michael
    5. June 2015 at 07:20

    I still don’t get what you mean when you talk about “the new normal” for NGDP.

    Are you saying the Fed is implicitly targeting 3% NGDP growth? Or are you making a different argument?

    If the Fed adopted a NGDP target of 5%, would you expect inflation of 3.8%?

  11. Gravatar of Neil Neil
    5. June 2015 at 07:38

    So, then what do you make of Gross Domestic Income? It has been running considerably stronger than GDP. If GDP is being understated, productivity is likely to look a bit better. Over the last five years, nominal GDP has been trailing GDI by about 0.4ppt per year (3.8% vs. 4.2%).

  12. Gravatar of Cameron Cameron
    5. June 2015 at 08:01

    “Again, get used to 1.2% RGDP growth; it’s the new normal, the new trend line.”

    Why assume because productivity growth has been slow it will remain slow? It seems hard to predict.

  13. Gravatar of benjamin cole benjamin cole
    5. June 2015 at 08:03

    If you put a monetary noose on an economy, do not be surprised if output sags and a there is a corresponding decrease in productivity.

    Thought: oil shale production per well has risen dramatically in the last 10 years. Why? Lots of demand, baby, lots of demand.

  14. Gravatar of flow5 flow5
    5. June 2015 at 08:08

    The Fed needs to stop paying interest on reserves, for none other reason than it artificially raises the exchange value of the U.S. dollar.

  15. Gravatar of Relax, the jobs recovery is back on track – The Washington Post Relax, the jobs recovery is back on track - The Washington Post
    5. June 2015 at 08:53

    […] in the first quarter, which might be a blip, but seems like less of one when you consider, as Scott Sumner points out, that productivity has only grown 3 percent in total the past five years. If this past […]

  16. Gravatar of Bonnie Bonnie
    5. June 2015 at 09:15

    I wonder if there are adjustments to the productivity measures for the ACA (ObamaCare). I looked for a reputable study of additional labor costs attributable to the ACA, but have yet to find one. This is as close as I’ve come so far.

    Referring to flow5’s analysis of money flows above, I think I agree with his conclusion. We need growth and investments in productivity to pay for the ACA monstrosity, not tight money.

  17. Gravatar of pras pras
    5. June 2015 at 10:15

    I too am very confused by the claim of a new normal for NGDP? This would imply that it is out of our control to raise or reduce, which is clearly not the case according to moneterists.

  18. Gravatar of dbeach dbeach
    5. June 2015 at 10:16

    Would this lower level of productivity growth argue for a lower NGDP target if the Fed switched to that? So if you expect 1.2% RGDP growth should you set the NGDP target to 3.2% (instead of 4.5 or 5%), potentially leaving you still susceptible to the ZLB? Or do you think the ZLB would not be an issue under NGDP targeting?

  19. Gravatar of ssumner ssumner
    5. June 2015 at 11:28

    Mike, You asked:

    “Can anything be done policy wise about productivity or is policy pretty much powerless?”

    Yes, stop electing politicians who favor more government spending, regulation, taxes, wars on drugs, NSA spending, etc. Small government capitalism promotes productivity. Libertarianism.

    Michael, No, they are targeting inflation, and this target will lead to about 3% NGDP growth.

    Neil, I didn’t know the discrepancy was that large. That’s pretty embarrassing for the BEA.

    Cameron, I agree, but I don’t see any reason why it would change in the near future. I hope I am wrong. Eventually it might pick up.

    Pras, No, they can control it; I’m predicting they will set policy at a level that achieves 3% NGDP growth.

    dbeach, Only to the extent the slower growth is due to slower population growth, not slower productivity growth.

  20. Gravatar of DanielJ DanielJ
    5. June 2015 at 12:13

    Shouldn’t we expect a productivity slowdown as more workers on the sidelines enter the workforce much like Britain saw? As for population growth, I’m starting to think that NGDP growth will “pull” on population growth through immigration much as it did during the 2000’s. Even with a massive wall and drones, I can’t imagine that will stop those that want work from getting here and employers that need headcount to fill the manual labor jobs. Once the labor market tightens I suspect productivity and population growth will resume, albeit not as high as before but certainly higher than a Great Stagnation theory would predict. If there was a Great Stagnation, it would’ve already showed up by the mid 2000’s when business investment on computerized technology stagnated and the gains from the 90’s tech boom subsided. While wages indeed stagnated, GDP growth did not, it simply “recalculated” into housing, which I still don’t really think was such a bad thing, only regulated taxed in a highly inefficient manner. So to sum up
    1) NGDP growth ‘tugs’ population up resulting in higher pop growth
    2) Productivity stagnation due to TGS should’ve slowed across the board in the mid 2000’s, TGS didn’t kick off just because Tyler Cowen wrote a book.
    3) If business investment stagnates, then within the confines of the NGDP barrier, the real economy recalculates into what it has always defaulted to: land and housing.
    4) Point 3 is not necessarily a bad outcome if regulated and taxed correctly.
    5) All this means that even if TGS is true, it shouldn’t have such a massive impact on NGDP.

    Keep the target at 5, the U.S. can handle it.

  21. Gravatar of Steve Steve
    5. June 2015 at 12:44

    Productivity is bad because all the new jobs are:

    1- Medical paperwork shuffling (insurance, billing, reason coding, subsidies, tax prep)

    2- Financial compliance paperwork

    3- Shifting to part time for health insurance reasons

    Also, what collin said.

  22. Gravatar of ChrisA ChrisA
    5. June 2015 at 17:59

    Scott – your sentiment reminds of your own comment on the recent Japanese “recession” – if that is a recession then give me more of it. Yes measured gross monetary output fell, but employment rose.

    So if we really are in a new paradigm; where inflation is low, unemployment is low, we get new shiny toys all the time, the variety of entertainment available at the click of a mouse is magical, the videophone (aka skype or facetime) arrives almost unnoticed, restaurant and hotel qualities are better than ever and cheap flights are available almost to anywhere in the world, there are several new sources of cheap energy that have been discovered that are material (shale gas, shale oil, solar energy); well give me more of this!

    So count me in the camp of the digital economy not being properly measured. By the way I think the issue is much more complex than just hedonic adjustment on computers . For example I just don’t know how to measure the value of your post here and the discussion and dialogue we are having. Broadly speaking to have this kind of rapid discussion in the past we would have had to all fly to some conference somewhere, at great cost. This would have surely shown up in measured GDP as a positive, and there would have been opportunities to put in place productivity improvements on that expenditure. Now the expenditure doesn’t exist so no productivity improvements are possible. But your and your commentators output has clear value it seems to me.

    Other areas that are interesting, I am not particularly wealthy but I save much of my income. I have maxed out on most areas of consumption not due to lack of money, but I am saturated. For instance in food and drink, I eat and drink all the food I want. But that only comes to a small part of my income. Same with vacation, cars, houses and so on. So my interest now is in quality. I am looking for higher quality food, cars etc. But quality is notoriously hard to measure. When a hotel improves its quality, perhaps by adding more cleaning staff, their measured productivity goes down unless their is hedonic adjustment. The reason that they add more staff nowadays rather than lowering their costs or taking more profit is due to online reputation systems like Trip Advisor. The impact of these real time quality measurement systems were huge in manufacturing improvement in the 70″s and 80’s (who can forget the Denning revolution). Why should they not be massive in terms of consumer activities as well?

    The main issue I can see with this “slower productivity” appears to be tax revenues. As smaller monetary economy means less taxable opportunities. Personally I am OK with that but for those who are not, the simple answer is a more expansionary monetary policy. Increases in asset prices can then be taxed as well as the inflation tax itself.

  23. Gravatar of Market Fiscalist Market Fiscalist
    5. June 2015 at 18:13

    To re-ask Micheal’s question from above and assuming the fed changed its policy:

    “If the Fed adopted a NGDP target of 5%, would you expect inflation of 3.8%?”

  24. Gravatar of Ray Lopez Ray Lopez
    5. June 2015 at 18:40

    Sumner misuses the phrase “Great Stagnation” (GS), coined by Tyler Cowen, who (sadly IMO) brought Sumner into the public eye via a mention in his popular blog, Marginal Revolution.

    Technically speaking, GS refers to not a mere loss in productivity at all, but rather a stagnation in technology, or, if you wish to get technical, a stagnation in Total Factor Productivity due to old technology. You can still have high productivity in a “Great Stagnation” world, or even negative productivity in a non-Great Stagnation world (as happens when there’s a transition from human to machine efforts, sometimes the machines need to be ‘trained’ for a few years before they become productive, as in the very early cars vs horse and buggy).

    In short, productivity and Great Stagnation are two separate things. BTW I’m a business guy, not a professor emeritus. I should not be giving the lectures here.

  25. Gravatar of Don Geddis Don Geddis
    5. June 2015 at 19:21

    @Ray: I completely agree with you! P.S., only read the final sentence of your comment, assume the rest was similar & supportive.

  26. Gravatar of Major_Freedom Major_Freedom
    5. June 2015 at 19:57

    Higher nominal statistics always bias upward reported real statistics, regardless of what actually occurred with real variables.

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    6. June 2015 at 00:37

    Measuring productivity is hard enough but why compound the problem by failing to specify what type of productivity measurement one is talking about?

    For example, the latest productivity statistic cited in the Reuters article was with respect to *labor* productivity (minus 3.1 percent on an annual basis in the last quarter) even though they failed to mention that specifically. It then goes on to cite JP Morgan for the idea that “productivity” has averaged only a 0.6 percent gain on an annual basis over the past 5 years. The latter is presumably what Scott is referring to when he wrote that “productivity” has only increased by 3 percent in the past five years. JP Morgan appears to be referring to total factor productivity and not just labor productivity. While gains in measured labor productivity have been dismal over the past 4 years, it would sure help one’s understanding if people writing about this stuff would be more specific. Defining one’s references would help in identifying where the problems may be. If labor productivity and total factor or multi-factor productivity are the same thing why do we pay people to measure both?

    Or, am I dancing on the head of that needle?

  28. Gravatar of Ray Lopez Ray Lopez
    6. June 2015 at 05:03

    @Don Geddis – bravo for agreeing with me! You are being slowly deprogrammed by me and MF, and that’s good. PS–you are unclear as usual when you state: “P.S., only read the final sentence of your comment, assume the rest was similar & supportive.” assume what?? – muddled language, muddled logic. No wonder you constantly fail to score points vs Britonomist and MF.

  29. Gravatar of George Balella George Balella
    6. June 2015 at 05:07

    When we set up the economy to benefit mostly those at the top what do you expect? The economy is not stagnant if your on top. Record corporate profits, record levels of GDP going to finance, record stock returns and record levels of income gains going to the top. We have financialized the economy which favors speculation over real investment. Keynes understood all these things a century ago but these realities do not please those on the top doing so well…. nor their minions.

    Why does financial sector growth crowd out real economic growth?

  30. Gravatar of Michael Byrnes Michael Byrnes
    6. June 2015 at 05:10

    Matt Yglesias pulls out an interesting quote from Keynes:

    “It may, of course, be the case “” indeed it is likely to be “” that the illusions of the boom cause particular types of capital-assets to be produced in such excessive abundance that some part of the output is, on any criterion, a waste of resources; “” which sometimes happens, we may add, even when there is no boom. It leads, that is to say, to misdirected investment. But over and above this it is an essential characteristic of the boom that investments which will in fact yield, say, 2 per cent. in conditions of full employment are made in the expectation of a yield of, say, 6 per cent., and are valued accordingly. When the disillusion comes, this expectation is replaced by a contrary “error of pessimism”, with the result that the investments, which would in fact yield 2 per cent. in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 per cent. in conditions of full employment, in fact yield less than nothing. We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.

    Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest![5] For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

  31. Gravatar of ssumner ssumner
    6. June 2015 at 06:09

    Daniel, I agree with some of your points, but didn’t the productivity slowdown start around 2004? Immigration reform would certainly change my forecast.

    Steve, That’s part of it.

    ChrisA, That’s what I keep asking. What’s so bad about the richest (sizable) country in world history getting richer and richer?

    Market Fiscalist, Yes.

    Ray, Tyler is not talking about labor productivity?

    Vivian, Yes, I am referring to labor productivity, which is what the term almost always refers to unless qualified by “total factor”.

    George, Keynes was a fan of “crowding out”? Who knew?

    Michael, The first of those two paragraphs is excellent. The second, less so.

  32. Gravatar of Ray Lopez Ray Lopez
    6. June 2015 at 08:45

    @Sumner – you are the expert here. Seems T. Cowen was writing for a lay audience, and deliberately avoided mentioning “Total Factor Productivity” (TFP) but it’s clear that’s the thrust of his book “Great Stagnation”. After all, the number of workers will decrease when the robots take over, hence labor productivity will necessarily go up, but the real heavy lifting in productivity will be increased TFP IMO. It’s pretty obvious.

  33. Gravatar of What if the Export-Import Bank expires? What if the Export-Import Bank expires?
    6. June 2015 at 11:21

    […] is now reporting this is very likely to happen.  That does not distress me, but if it bothers you I have a simple offset: a looser monetary […]

  34. Gravatar of BC BC
    6. June 2015 at 18:15

    Are productivity statistics adjusted for age demographics? Suppose workers’ output as a function of age is fixed, perhaps gradually rising in one’s 20s as one gains experience, peaking at age 30-55, and declining afterwards until one retires. If there is a large Baby Boom generation in their 30s and 40s during the 1980s and 1990s followed in the 2000s and 2010s by a small Gen X in their 30s and 40s and large Baby Boom generation in their declining productivity years, then would we expect to see per-worker productivity declines just from demographics alone?

  35. Gravatar of dtoh dtoh
    7. June 2015 at 04:02

    I sound like a broken record, but it’s the

    60% increase in the tax rates on capital income.

  36. Gravatar of ssumner ssumner
    7. June 2015 at 05:15

    Ray, Obvious to you, but not to me.

    BC, It’s not adjusted for demographics, but I doubt that would make much difference.

    dtoh, I sound like a broken record, but that effect would be orders of magnitude lower, and the slowdown began far before the tax increases. Growth accelerated in 2013 when they raised taxes.

  37. Gravatar of Does Y determine MV or is it MV that determines P? | The Market Monetarist Does Y determine MV or is it MV that determines P? | The Market Monetarist
    7. June 2015 at 07:01

    […] Sumner a couple of days ago wrote a post on the what he believes is a Great Stagnation story for the US. I don’t agree with Scott […]

  38. Gravatar of Dtoh Dtoh
    7. June 2015 at 07:04

    “Growth accelerated”….. I thought we were talking about productivity.

    And…. the tax increases were anticipated/known well before 2013….or don’t expectations matter?

  39. Gravatar of flow5 flow5
    7. June 2015 at 13:29

    using the BLS’ own Native-Born series, also presented on an unadjusted basis, we find the following stunner: since the start of the Second Great Depression, the US has added 2.3 million “foreign-born” workers, offset by just 727K “native-born”.

  40. Gravatar of flow5 flow5
    7. June 2015 at 13:35

    QE2 and QE3 encouraged FINANCIAL investment – as opposed to REAL investment (investment that impacts productivity).

    Real-investment is a debt acquired to finance the acquisition of a [1] (new-security), the proceeds of which are used to purchase productive, or income generating fixed assets, or intangible assets like patents, recorded on financial statements as long-term assets, or beyond an annual accounting period or tax year.

    CAPEX expenditures represent real-investment, capital goods (amortized or depreciated over their useful life), used to increase a business’ future income streams, those investments used to develop, upgrade, or add to: plant, machinery, new technology, and equipment: i.e., more efficient assets in which to produce higher quality, larger output, and lower unit costs; or e.g., the construction of a new house in which to occupy, or the replenishing or expansion of inventories, etc.

    Whereas financial-investment is the purchase of an [2] (existing-security – aka Bankrupt U Bernanke’s so-called “wealth effect”), or outlays used to finance the purchase of an existing house (read bailouts, restructuring, refinancing, rolling over, or the transfer of ownership of existing assets/inventories, and/or OPEX).

    Financial-investment (e.g., the all-time high margin debt,-a leakage in National Income Accounting, @ $507B in April 2015), provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy (1929 is the paradigm).

    Compared to real-investment, financial-investment is rather inconsequential as a contributor to employment and production. Only debt growing out of real-investment or consumption makes an actual direct demand for labor and materials.

  41. Gravatar of maynardGkeynes maynardGkeynes
    7. June 2015 at 15:55

    “ChrisA, That’s what I keep asking. What’s so bad about the richest (sizable) country in world history getting richer and richer?”

    Sermon on the Mount?

  42. Gravatar of ssumner ssumner
    8. June 2015 at 10:32

    dtoh, OK, the tax increase might have slowed growth by 0.1% per year, 0.2% at most.

  43. Gravatar of dtoh dtoh
    8. June 2015 at 16:52

    How are you coming up with 0.1% and 0.2%? Is this just a guess? And what about the rest of the slowdown? Where did that come from?

  44. Gravatar of Postkey Postkey
    9. June 2015 at 03:28


    You may like this?

    “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power – something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”

  45. Gravatar of ssumner ssumner
    9. June 2015 at 04:48

    dtoh, Yes, but an educated guess, based on decades of observation. I don’t know where the rest of the slowdown came from, but the timing is not right for the capital gains tax to be the cause. As I said, it start back in 2004. I recall when the top rate of cap gains was much higher than today (late 1980s, early 1960s, 1950s), and there was no noticeable productivity problem.

  46. Gravatar of W. Peden W. Peden
    9. June 2015 at 05:08


    Luke Chapter 6:

    “24 But woe to you who are rich,
    for you have already received your comfort.
    25 Woe to you who are well fed now,
    for you will go hungry.
    Woe to you who laugh now,
    for you will mourn and weep.
    26 Woe to you when everyone speaks well of you,
    for that is how their ancestors treated the false prophets”

    Economic policy may require a lot of reorientation if these claims are correct, and it may be a good idea to ban comedians for the amount of future misery they are causing. And giving food aid to foreign countries apparently just makes them hungrier in the future, though this is probably not a reference to Malthusian theory in Luke.

  47. Gravatar of dtoh dtoh
    9. June 2015 at 19:52


    1. What was the effective rate on capital income after taking into account deductions and credits in the 50’s and 60’s? (Hint – mid teens)

    2. In order to judge the effect of tax rates on investment (and productivity) you need to look at a broader time scale…. When does the market expect the increase to occur, when does it actually take place, when does the gain occur, and when is the gain realized for tax purposes. Also what is the tax impact on liquidations of existing investments needed to make new investments.

    3. As I have repeatedly said, the asymmetry of returns greatly impacts the effective after tax rate of return. If you have an economy investing in steel mills, auto plants or semi-conductor fabs, the returns are much more symmetric than investments in Rte 128/Silicon Valley high tech start ups. This has a huge impact. In an advanced economy like the US in 2015 where much investment (and productivity gains) takes place in high risk high return enterprises, then the changes in tax rates are going to have a hugely amplified effect on an after tax returns (the only returns which matter.) Past history is no guide to judging the impact of these tax rate hikes.

  48. Gravatar of About That Obama Economy | About That Obama Economy |
    6. October 2016 at 05:25

    […] Yes, the Great Stagnation is here […]

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