Do sector-specific disturbances drive most of the productivity growth slowdown?
Core argument: The construction sector accounts for 30% of the slowdown in aggregate total factor productivity growth, and since 1950 more than two-thirds of the secular decline in aggregate TFP growth stems from sector-specific rather than aggregate disturbances.
The slowdown in Total Factor Productivity (TFP) growth is highly sector-specific, with the construction sector accounting for 30% of the decline. Since 1950, more than two-thirds of the secular decline in aggregate TFP growth results from sector-specific disturbances rather than aggregate ones. This trend is mirrored in labor growth, particularly after 1980. The dynamic multi-sector framework shows that changes in TFP or labor growth in one sector can significantly impact GDP growth across other sectors due to inter-sectoral linkages. These linkages result in GDP growth multipliers that can be up to three times a sector's value-added share. Over the last six decades, changing sectoral trends have reduced trend GDP growth by approximately 2-3 percentage points. The construction sector's significant contribution to this decline highlights the persistent effects of structural changes on capital accumulation, suggesting a continued fall in trend GDP growth over the next decade without positive disturbances.
Ed Comment:Obviously, I couldn't agree more. Shocking what a bunch of nitwits many mainstream economists are on this topic. They haven't rethought it since they read it in textbook in college 30 years ago based on thinking from 30 years before that. We let them damage our economy without giving it a second thought. It's too bad petiis can't see straight on inequality. That people have to earn the money before it can be redistributed and if it's redistributed it may never be earned in the first place."....While foreign investment usually benefits developing economies and creates local economic benefits in advanced economies, it generally does not benefit advanced economies on the whole except in very limited cases. On the contrary, foreign investment in advanced economies is more likely to lead to higher unemployment or rising debt....The idea that a country automatically benefits from foreign investment is based on the assumption that productive investment in any country is always constrained by a shortage of capital. That is why when foreigners promise to invest in a country, it is assumed that this will lead to an increase in productive investment. But like many other widely shared assumptions among economists about what is or isn’t good for the economy, this assumption is too rigid. Foreign capital inflows into any country can lead to an increase in productive investment only under certain circumstances. Under other circumstances, these inflows are more likely to lead to either more unemployment or more debt. What matters are the underlying conditions in a given country and, to a lesser extent, conditions in the country from which the investment originates. In fact, as I will show below, while Chinese investment can cause developing economies to grow faster, it is unlikely systematically to benefit the UK or other advanced economies. This extremely unintuitive conclusion seems to fly in the face of many years of policy direction and behavior, but it follows automatically from working logically through the ways in which foreign investment affects recipient countries.The key is to recognize that an assumption that implicitly governs much classical economics—that capital is a scarce resource—while probably true for most of modern economic history is now obsolete, at least for most advanced economies. Because countries like the UK do not suffer from a scarcity of investible capital, the benefits of foreign investment are not nearly what once was believed.... foreign investment inflows, as the obverse of current account outflows, can damage developed economies. Specifically, foreign investment inflows pose two potentially large costs to the UK. First, in the case of foreign direct investment, foreigners may buy British companies to acquire and transfer advanced technology. This may or may not harm British economic growth over the medium term and the long term depending on the specific circumstances, which I probably don’t need to rehash as journalists have discussed this issue quite a bit. The second cost is potentially even greater. Countries that receive net foreign investment inflows, whether direct investment or portfolio investment, by definition will necessarily see either domestic investment rise or domestic savings drop.2 If net foreign capital inflows don’t cause investment to rise in advanced economies like the UK, (and may even cause it to decline if these inflows export consumption demand), they must force down the domestic savings rate. This very important point is almost always misunderstood and so worth repeating. If any country sees an increase in its net foreign investment inflows, there are corresponding changes in three accounting identities which, precisely because they are accounting identities, must occur simultaneously and are simply different ways of saying the same thing: (1) the country’s capital account surplus will rise by the amount of the increase in net foreign investment, (2) its current account deficit will also rise by exactly the same amount, and (3) the excess of domestic investment over domestic savings will rise, again by exactly the same amount. Because the UK is an advanced economy in which investment is unconstrained by scarce capital, the country’s investment level will not rise with an increase in net foreign inflows, in which case its savings must automatically decline, as the gap between the two rises exactly by the amount of the net foreign investment inflow. Economists and policymakers still find it hard to understand how foreign capital inflows can automatically depress domestic savings. But as I have discussed several times before (for example, here, here, and here), there are many ways in which they can do so. These, broadly speaking, always result in either higher unemployment or higher debt, neither of which the UK is likely to see as a good thing.It isn’t a coincidence at all, by the way, that countries with the most open and flexible capital markets and the best financial-market governance (basically the Anglo-Saxon economies) have run permanent or nearly permanent deficits driven by low savings since the 1970s: capital inflows have depressed domestic savings. That is why when analysts argue that their low savings prove that the UK (and similar countries, like the United States) need foreign capital, they have it exactly backwards. If foreign capital does not drive up investment, it must drive down savings. These economies receive the excess savings generated abroad not because they need the money (in which case they would have been driven by rising interest rates) but rather because the excess savings were forced into countries that could best accommodate them (in which case they should drive down interest rates, as they seem to have done). This means that foreign capital inflows into the UK—whether from China, the United States, elsewhere in Europe, or anywhere else—force the UK to accept either rising debt or rising unemployment (or some combination)...."