The STEM subjects (Science, Technology, Engineering and Math) get all the attention these days. But while economics isn’t in the spotlight, it does have one thing in common with the STEMs.
Everything in economics, no matter how straightforward it sounds, quickly becomes a sea of complications once you get into it. And the STEM sciences are the same way. While we all understand the apple falling on Newton’s noggin and enjoy the nitrogen-frozen tennis ball shattering on the floor, the rest of physics is complicated. The fun is over and equations are underfoot everywhere you turn.
In economics complications ruin everything. For example, we have a perfectly understandable answer to why most people were unhappy with the U.S. economy: the rich people are grabbing all the money. The answer is that the got-bucks’ share of the economy’s income has grown rapidly while labor’s share has hardly grown at all.
That simple answer was both irrefutable and obvious to anyone who looked at the data in a chart or a graph, and its simplicity allowed politicians to take very different stances on the matter — which is always helpful in an election year. No one denied the basic data, but they differed widely in their interpretations of it. Some said that while it was true it wasn’t really a problem. Others saw it as unfair, and proposed various ways to restructure the economy: strengthen unions, reverse foreign outsourcing, or redistribute the income through the tax code.
While the proposed solutions were diverse, all of us, or most of us, were satisfied that we knew the cause of the problem: the rich were too grabby.
Now, some economists are coming along to ruin everything. They started asking questions like “why,” and “how,” and the whole thing got complicated in a hurry.
One theory about our wage stagnation cites our productivity slowdown as the main reason why wages haven’t grown. To complicate matters, though, that theory was accompanied by questions about how accurately we measured productivity.
Fortunately there are economists willing to take on complications, and recently three of them — one each from the Federal Reserve Board , the Reserve Bank of San Francisco and the International Monetary Fund — looked into the measurement issue. The results of their research have been published in a Brookings Institution as, “ Does the United States have a productivity slowdown or a measurement problem?”
The authors found that “After 2004, measured growth in labor productivity and total factor productivity (TFP) slowed.” To analysts, a turning point such as this slowdown is very useful, for it guides the search for causes. They were particularly interested in whether the government was measuring productivity incorrectly.
A significant, noticeable turning point in the data, as in 2004 when productivity growth slowed down, would identify the principal suspect if the government had changed its measurement system then. But it hadn’t, and that made the measuring system less likely to be the cause of either the abrupt decline after 2004 or the overall lackluster growth rate.
The authors, David M. Byrne, John G. Fernald and Marshall B. Reinsdorf, then examined the possibility that the productivity decline was due to mismeasurement of the gains from information technology innovations. They did find some mismeasurement but it was going the wrong way and could not explain the drop after 2004.
They also found that the efficiency gains from much of the consumer-oriented IT innovations are in areas not measured by market values — a point also made recently in a Herald column on workplace productivity.
Where does all this leave us? Technically speaking, we are without a paddle if our goal was to find that labor simply wasn’t being compensated for productivity gains.
The basic concept of productivity is rooted in history more than economics. We think of productivity as output per unit of input — front suspensions installed per hour of labor, for example. That was fine when the U.S. economy was primarily a goods-producing system, but we haven’t really been that kind of economy since the 1950s.
The service sector is now the dominant element in our economy and it provides 80 percent of our jobs. And yet, the concept of productivity in the service sector is still difficult to reconcile with our real world concept of the word.
The link between productivity and wages has always been somewhat tenuous, and workers’ compensation levels in the private sector have are more determined by the supply and demand forces in play.
The bottom line is that we should abandon any efforts to tie political solutions to the stagnant wages and shrinking middle class problems to productivity. Our economic problem isn’t simple and is at least as likely to fix itself as be solved by government.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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