Productivity and costs: two comments

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Megan mentioned the latest data on productivity and costs.  Two quick notes about this:


1.  From the fourth quarter of 2000 through the fourth quarter of 2008, output per hour in the nonfarm business sector rose by 22 percent.  The increase from 1992 to 2000 was 15 percent.  That means that productivity growth during the Bush years was fifty percent higher than in the Clinton years, when it was not too shabby. 

2.  For business, growth in profits equals growth in productivity minus growth in real wages.  In the fourth quarter, if productivity rose 3.2 percent at an annual rate but real compensation grew 15.6 percent at an annual rate, that means that profits fell by 12.4 percent at an annual rate. 

The key to economic recovery is really quite simple:  restore profitability.  Profits are the market's signal to expand, and losses are the market's signal to contract.  The swiftest way to recovery would be to take steps to increase profits.  I continue to recommend cutting the employer contribution to the payroll tax, which would reduce labor costs and make workers more economical to hire.

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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