Tuesday, March 15, 2011

Productivity Growth and Government Debt

Who reaps the rewards of productivity?

Productivity matters for the prosperity of children because it measures the amount that an average worker produces in an hour of work. If productivity rises by 10% over three years, that means that we can produce 10% more output with the same amount of work than we could three years ago. The size of the economy was roughly $14tn three years. A 10% rise in productivity means that we can produce approximately $1.4tn more this year with the same amount of work. This would come to an additional $18,000 a year for an average family of four.

Alternatively, a 10% rise in productivity would mean that we could produce the same amount of output as we did three years ago, while working 10% less time.
At this point, the politicians start screaming about the debt bankrupting our kids. The problem with this claim is that our kids will own the debt. At some point, all of us will be dead, meaning that the people who hold the bonds that constitute the debt will be our children and grandchildren.

How can holding government bonds make our children bankrupt?

The author dismisses the problem of foreign ownership of government debt erroneously. The problem is if you have to pay foreigners the interest that is essentially a tax on current production to pay for past overspending.

Japan has far more government debt than other countries. http://investing.curiouscatblog.net/2010/10/18/government-debt-as-percentage-of-gdp-1990-2009-usa-japan-germany-china%E2%80%A6/ Yet that is not as big a problem as it seems as they owe most of it to themselves. That is still not a great condition to be in but it means you will just have to pay a portion of yearly production to pay off a segment of society that owns that debt (it stays within your country).

Now all of this gets much more messy nowadays as the borders are much more transparent and movement is much easier...

I agree that productivity improvements are great and will help with the problem. But you have to understand that productivity measurements are extremely unreliable. All economic data has issues (see all the consternation over unemployment and inflation data) but productivity measures may well be the most problematic. They rely on significant guesses about what is really going on and have issues with short term unsustainable 'gains' often due to layoff, cutting maintenance... (things that get better productivity numbers but may well just be measurement issues not sustainable productivity improvements).

The author does correctly point out the problem of foreign ownership of debt is due to us living beyond our means (not in those words though) and borrowing from foreigners to sustain this level of comfort (just like the government is doing itself).

Related: The USA Economy Needs to Reduce Personal and Government Debt - Government Debt, Greece is a Very Small Part of the Problem - Dollar Decline Due to Government Debt or Total Debt? - Economic Measurement Issues Arising from Globalization

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