US labour productivity comment no. 2

Harry Shutt
Mr Smithers makes two surprising and rather fundamental errors;

1. He appears to suggest that the GDP growth rate is purely a function of the supply side rather than of market demand, whereas the slowing growth of the latter is the main cause of the "secular stagnation" which many economists have only belatedly come to see as a real constraint;
2. He ignores the phenomenon of the long-term rise in productivity of capital (declining incremental capital-output ratio) - arguably reflected in his Chart 1 for the US. This trend, which is a function of technological change, obviously spells steady decline in fixed investment for the foreseeable future.


Reply:

Dear Mr Shutt,

1. While short-term growth can be held back by a lack of demand, long term demand, which is the subject of this blog, is purely a function of supply. A economy cannot supply what it can’t produce!

2. Far from having a declining incremental capital-output ratio that of the US appears to be on a long term rising trend. A chart along with the data is available to view/download from the download link below.


US labour productivity cmment no. 2
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