First of all, props to Blinder for putting supply-siders in their place. I never understood how people could buy so far into a theory that was mathematically unexplainable. Glad to hear I’m not just a crazy person.
Turning to Krugman, I laughed when he asked whether people would actually figure out how to use computers, fiber optics and other advanced technologies to enhance productivity, like maybe they were just a fad or something. “Of course productivity will increase!” I thought, but then I realized a “productivity boom” was his good-case scenario and our economy isn’t exactly humming right now. Then I read his bad-case scenarios and realized that we actually experienced both.
Scenario 1: Happy Ending (Productivity Boom)
Looking at the BLS data, U.S. productivity growth averaged 2.08% in the 1990s and 2.56% in the 2000s! That’s exactly the kind of numbers Krugman speculated we would need to make many of our problems “fade away.” Below is a graph for productivity growth over the past 23 years. As you can see, though highly variant, we’ve been doing better than the sub-two percent levels of the 1970s and 1980s. So why isn’t everything sunshine and rainbows? Well, pretty clearly, we’re also living out some of the nightmares of...
Scenario 2: Hard Landing
In this section, Krugman points to potential over-optimism and a potential government debt crisis as two factors that could drag our economy under. Remember when everyone said that growth would always be high and unemployment wouldn’t go above 5 or 6%? Remember the 90s (ok, so maybe we don’t actually remember them very well, but we’ve heard that things were pretty optimistic then)? And of course I don’t need to remind anyone of the summer of 2011 when the U.S. credit rating got downgraded because our debt is out of hand and our Congress is incapable of doing anything about it.
I know that the whole "Boom of the '90s/early '00s caused the recession" thing isn't new, but I thought it was interesting that while Krugman presented the two scenarios as kind of an either/or situation, in reality it was one and then the other.
Final note/question:
All of the productivity numbers make sense to me (rapid increases in the late ‘90s/early ‘00s, followed by a cooling off period) until about 2007. Why is there such a huge spike from ‘08-’10 followed by a massive fall in ’11? The previous rise and fall seems explainable by integration of new technologies into production, but such a severe spike seems hardly explainable this way. Hopefully the all-knowing PPEers, led by the fearless Prof. Bloms can figure this one out. Then again, Krugman did say productivity was largely unexplainable, so maybe I’ll just have to live in wondering.
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