Bastiat's house floods, productivity rises

If I had to sum up a phrase that captured the essential character of Alan Greenspan during his time at the Fed, that phrase would be, "the boy who cried productivity." Just as the boy who cried wolf eventually discovered, after being fooled a few times people won't believe you anymore.

As I recall, one of the reasons Greenspan gave for cheer leading the Technology boom was its supposed dividend, higher productivity. So sure was Greenspan that productivity was rising that he decided to revise the manner in which the data were collated, as he describes in this speech from 2000:

To make any headway toward understanding productivity trends, one must first understand the data. In that regard, disaggregation often uncovers troubling implications of the underlying data that are not immediately obvious. For example, separating nonfarm business sector output per hour into nonfinancial corporate, financial corporate, and noncorporate sectors has revealed disquieting problems with the measurement of productivity, especially in the noncorporate sector. The Commerce Department will soon release data on output by industry, or "gross product originating," which will allow this decomposition to be updated to more fully reflect the benchmark revision to the national income and product accounts (NIPA) published last fall. Taken at face value, the prerevision data suggested that the level of noncorporate output per hour was no higher in the late 1990s than it had been in 1985. Indeed, the data pointed to falling levels of productivity for many years in such industries as construction and medical, legal, and business services--areas that are important in the noncorporate sector. These statistics, however, are wholly at variance with our casual day-by-day experiences. Perhaps this Thursday's re-benchmarked GPO data will paint a significantly different picture. But, their doing so would only reinforce the argument for downweighting from our analyses sectoral data that are subject to such large revisions.

From a qualitative perspective, by which I mean with an idea of productivity as more output with less effort in mind, the third quarter seems to me to have been a disaster. Surely flooding the city of New Orleans was non-productive. Surely the deterioration in the levee system was non-productive. Surely the "shut-in" oil and gas production since Hurricanes Katrina and Rita, now approaching 18% and 14% of annual Gulf production was non-productive. Surely waging war is non-productive. Bastiat's window broke, half the house blew down, yet "productivity" rose faster than it has in years, and somebody still wants to argue that the phenomenon this data measures is "productivity?" To quote easy Al back at him, These statistics, however, are wholly at variance with our casual day-by-day experiences.

Reading today's data release reminded me of an old story I wrote, A Fruity Fable, which I'll append here.



Imagine, if you will, a group of people whose health depends upon eating a specific type of apple every day. While not immediately fatal, a failure to ingest the nutrients from that specific apple each day led to immune system suppression. Given this physical foundation, these people became quite adept at both producing and accounting for these apples.

Over time, the two functions of production and accounting began to dominate the culture of these people. Good harvests of the apples were cause for celebrations, awards were given for study which led to more efficient use of the nutrients and the whole society was kept up to date on the quantity of the special apples in the storerooms.

One day, a young student, while examining the price changes of luxury goods, noted a relationship between the prices and the reports of increased apple stocks. As the people read of higher apple stocks they felt better about their future prospects and purchased more luxury goods. Enterprising thoughts raced through his mind at this discovery.

Eventually, this young student shared his research with a group of luxury goods merchants who were quite eager to hear of his work. This group, in turn, worked to build relations with the apple accountants, a monastic group known for their attention to detail.

After years of wining and dining, relationships were formed between some of the luxury goods merchants and some of the apple accountants. These people formed research foundations whose aims were to stress the similarities between the special apples and other types of apples. Over time, it became harder and harder to find apple accountants who had firm ideas about the qualities which comprised a "good" apple. Meanwhile, t-shirts and billboards began to appear exhorting people to eat an apple a day, with pictures of generic apples.

Coincidentally, the nightly reports of apple stocks started showing unprecedented growth rates. Some people, who came to be known as "apple fundamentalists" protested that the reports were incorrect but they didn't manage to capture the imagination of the people, who were quite pleased to read of their good fortune. They were so pleased that sales of luxury goods soon followed the trend of the apple stock reports. Lost in the shuffle of the new wealth was a disturbing up trend in immune system deficiency among the poor in the society, who often cut corners and did not buy their apples at the finest stores.

In time, however, the up trend in apple stocks leveled off which led to a decline in the purchase of luxury goods. Due to the extent of the just ended boom in luxury goods purchases there were now many members of the society engaged in the production, distribution and sale of these goods. Unhappy with the notion of a less affluent lifestyle, they turned to the daughter of the man who discovered the relationship, now known as the "wealth effect", between apple stocks and luxury goods demand.

After a careful study of her father's later work with the apple accountants, she recommended the creation of a foundation whose aim was to stress the similarities of apples and oranges, a very plentiful fruit in their country. This foundation not only worked with the press, it also worked with the education department. The foundation, whose motto was, "fruit is good food", eventually won an award for funding the purchase of textbooks for the entire nation, replacing the old, outdated models.

Soon the nightly reports of fruit stocks began to rise again, indeed, they rose faster than during the past boom. Predictably, sales of luxury goods exploded, making investors in that sector fabulously wealthy. The "apple fundamentalists", now an even smaller group on the fringe of society no longer organized protests. Instead they worked to buy up old apple orchards, known for producing a particular type of apple whose yield was far less than other apples and dwarfed by the yield of orange trees.

The plague began suddenly. Following a weekend of frivolity after a spectacular orange harvest, children and old people began to fall sick. Hospitals were unable to keep up with the creeping illness, one which oddly did not decline with the injection of orange juice. One group, however, was spared. In a matter of weeks the only people able to help were those crazy "apple fundamentalists". Like angels they visited the hospitals and cured the sick, sparing the lives of many in the nation.

Now chastened, the King of Fruitland ordered a special TV program honoring the head of the apple fundamentalists. During the ceremony, the King asked this man what their error had been. This man, who had been raised to believe that one can only quantify a qualification, that qualifications of value were functional, not formal, and to lose the spirit of the qualification was to destroy the validity of the quantification said simply, "you can't compare apples and oranges".

So now you know where that idea comes from.