Until this morning, the official data showed that U.S. productivity growth accelerated during the financial crisis. Non-farm business productivity growth supposedly went from a 1.2% annual rate in 2005-07 to a 2.3% annual rate in 2007-09. Many commentators suggested that this productivity gain, in the face of great disruptions, showed the flexibility of the U.S. economy.
But the latest revision of the national income accounts, released this morning, makes the whole productivity acceleration vanish. Non-farm business productivity growth in the 2007-09 period has now been cut almost in half, down to only 1.4% per year.
This revision has political and policy consequences. Back in March, I analyzed the apparent productivity surge and argued that it was statistically suspect. I pointed out that:
First, the measured rapid productivity growth allowed the Obama administration to treat the jobs crisis as purely one of a demand shortfall rather than worrying about structural problems in the economy. Moreover, the relatively small size of the reported real GDP drop probably convinced the Obama economists that their stimulus package had been effective, and that it was only a matter of time before the economy recovered.
A more accurate reading on the economy would have perhaps caused the Obama administration to spend more time and political capital on the jobs crisis, rather than on healthcare. In some sense, the results of the election of 2010 may reflect this mismatch between the optimistic Obama rhetoric and the facts on the ground.
Now the productivity surge of 2007-09 has vanished, and so has the pretense that the U.S. economy was able to sail through the financial crisis with barely any problems. It’s time to set a new economic course.