The first-quarter U.S. productivity numbers make an intriguing contribution to assessing U.S. President Donald Trump's badgering of the U.S. Federal Reserve to reduce interest rates. And they potentially have very significant implications for the global debate on the crisis of capitalism.
The numbers appear to suggest that the rate of growth of productivity in the United States may, for a time, have picked up to around 1.5 percent, miserable by most post-war standards but better than the truly awful performance of the middle of the present decade. There is an important caveat: productivity numbers are notoriously unreliable and are subject to revision many years into the future. But if the apparent pickup is confirmed, the rate of growth of potential output in the United States could, taking account of population growth, have recently been around 2 percent a year.
But how does that matter for Trump's agenda and for the way the Fed might--or should--react? In answering that, it is vital to distinguish between one-off improvements in the level of potential output and ongoing improvements in the rate of growth of potential. There can be little doubt that the Trump effect has increased the level of potential output in the United States. It appears that part of that effect has been an expansion of the labor force, with a significant increase in the participation rate, perhaps through an improvement in the profitability for employers of paying the "reservation wage" (the wage needed to attract people into employment).
The result has been that the economy, even beginning from what seemed in 2017 to be full employment, has been able to grow, over the past couple of years or so, substantially faster than its trend rate of growth. The quiescence of inflation in the face of very low levels of unemployment and above-trend rates of growth may appear to be testimony to such effects.
Suppose that was all that had happened. A period of two or three years in which firms, on the basis of Trump's tax and deregulatory plans and a general shift in the psycho-political climate as it affects business, seemingly expected--rightly, as it turned out--more output with an increased labor force and little effect on wages that will have increased the anticipated rate of return over that period. Such a state of affairs would typically trigger what I have long called a "super-Say's Law" effect, in which the prospect of future supply calls forth more than its own current...