Trade and the productivity puzzle

In recent days and weeks, in various venues, Brad DeLong, Arnold Kling, and Virginia Postrel have stressed the importance of elevated productivity growth in the American economy. To quote DeLong: On the structural side, the American economy has been growing fast over the past four years. The productive potential of the American economy has grown ...

By , a professor of international politics at the Fletcher School at Tufts University and the author of The Ideas Industry.

In recent days and weeks, in various venues, Brad DeLong, Arnold Kling, and Virginia Postrel have stressed the importance of elevated productivity growth in the American economy. To quote DeLong:

In recent days and weeks, in various venues, Brad DeLong, Arnold Kling, and Virginia Postrel have stressed the importance of elevated productivity growth in the American economy. To quote DeLong:

On the structural side, the American economy has been growing fast over the past four years. The productive potential of the American economy has grown at an extremely rapid pace. But the rapid growth has not been the result of high investment (more capital). In fact, the rate of investment has been markedly slower than in the late 1990s. It has also not been the result of any action taken by the Bush Administration…. This story of positive structural changes in the American economy – the very rapid growth of potential output – is the big story about the economy during the past four years. It’s important both at the macro level – why is output-per-man-hour 20 percent higher than it was five years ago? – and at the micro level – how are people today doing their jobs and being 30 percent more productive than their predecessors of a decade ago? The news media aren’t covering this well. Yet it’s the really big story about the economy in the Twenty-First century.

I’ve also recently blogged about this topic here and here. However, as a public service of danieldrezner.com, I thought it worth linking to important and accessible discussions about the current productivity boom. Federal Reserve Vice-President Roger W. Ferguson gave a speech two days ago on the topic that’s worth reading. Shorter Ferguson — the incredibly elevated productivity boom of the last three years is a temporary artifact of the recent economic downturn, and is not likely to last. On the other hand, the trend increase in productivity that’s occurred since the early nineties is likely to persist for some time. Of course, Ferguson has caveats to his prognostication. Here’s one of them:

Although the exhaustion of technological possibilities seems unlikely to slow trend productivity growth, adverse changes in the economic, legal, and financial environment could threaten the longevity of the current productivity boom. For example, economists have long noted that free trade–and the specialization and economies of scale that it affords–fosters productivity increases. That our most recent productivity boom occurred against a backdrop of freer trade and increased globalization is likely no coincidence. However, the momentum for the liberalization of global trade now appears to be facing strong resistance. A halt in the movement toward freer trade or outright backsliding, such as the erection of new barriers to the trade of goods or services, would endanger the sustainability of the current productivity boom. Some observers believe that security-enhancing limitations on the international flow of capital, labor, and goods in response to an increased terrorist threat could have similar effects.

Read the whole speech.

Daniel W. Drezner is a professor of international politics at the Fletcher School at Tufts University and the author of The Ideas Industry. Twitter: @dandrezner

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