Predicting the Error Term
By Arnold Kling
The rate of productivity growth is a fundamental determinant of long-run living standards. Yet when it comes to understanding or predicting this variable, economics has been sadly deficient, especially at the turning points.
He refers to a paper that forecasts a slowdown in productivity growth. I have not read the paper, but I’m guessing that it talks about multifactor productivity, which is another way of saying the error term in a regression of output on capital and labor. Predicting the error term strikes me as a fool’s game.
But the larger issue is that the headline productivity number for the standard of living is not multifactor productivity, but labor productivity. Labor productivity is almost certain to grow rapidly, because growth in capital per worker is now being influenced by Moore’s Law. Computers are a sufficiently large share of the capital stock that improvements to computers now raise the amount of capital per worker in meaningful increments.
UPDATE: pushback from Gabriel Mihalache:
I don’t know much but I know this… a common trait of all good economists, regardless of other characteristics, is that they worship at the altar of TFP, at least at low frequencies. It seems to me that the self-titled Masonomics movement doesn’t.
I absolutely do agree that TFP is important over decades and centuries. My view is that TFP is determined by the pace of innovation. Again, I have not read the paper, but I don’t think that calibrated business cycle models are good tools for predicting future innovation.
Some commenters disagree that Moore’s Law implies advancing productivity. They argue that computers are not becoming more capable. But don’t just look at the PC. Look at iPods, cell phones, EZ passes, RFID’s, and other devices that benefit from shrinking transistors.