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Aug 22 / Jonathan

Everything we know about productivity is wrong

I’ve had a post from Matthew Yglesias lying around for several months. I’m not sure what to make of it all, except that much of our impression of economic “progress” for the last decade or so is illusory, most intriguingly productivity. This has implications beyond my depth.

The post comes from a presentation by Michael Mandel of Business Week.

But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out.

Herewith three of Mandel’s slides:

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If I were more ambitious, or at least had more time on my hands, I’d look for data going back a little farther, 1950, say, or at least 1970. Stories about productivity growth have had great explanatory value. If they’re wrong, then we need new explanations.

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