A Crisis of Demand, Not Productivity

Posted on  

"A Crisis of Demand, Not Productivity"

Neil Irwin writes: “When workers become more efficient, it’s normally a good thing. But lately, it has acted as a powerful brake on job creation. And the question of whether the recent surge in productivity has run its course is the key to whether job growth is finally poised to take off.” Ezra Klein and Jon Chait both comment on the piece in ways that accept this basic framing—paradoxically, even though productivity growth is key to long-run living standards, in the short-run it’s an impediment to job-creation.

That’s all true, but I think an unhelpful way of thinking about what the data on growth in GDP and productivity while employment stays flat means. The thing to say about these numbers is that they’re signs of inadequate demand. Our capacity to produce things is growing because the population is growing. And our capacity to produce things is also growing because productivity is growing. But final demand is not growing at a pace that’s equivalent to the growth in our potential output. And this—inadequate demand—is what’s causing our labor market problems. The solution is more expansionary fiscal policy and more expansionary monetary policy.

Or looked at another way, this is an added reason that it’s foolish to be worried about inflation. Inflation happens when you try to raise output at a pace that’s not justified by increases in productivity. But the increases in productivity mean that output should be able to increase rapidly on a “catch-up” basis without putting undue pressure on prices.

« »

By clicking and submitting a comment I acknowledge the ThinkProgress Privacy Policy and agree to the ThinkProgress Terms of Use. I understand that my comments are also being governed by Facebook, Yahoo, AOL, or Hotmail’s Terms of Use and Privacy Policies as applicable, which can be found here.