Tuesday, July 6, 2010

Productivity, Deflation, & Monetary Policy

according to the Bureau of Labor Statistics we’re more productive than ever:

Nonfarm business sector labor productivity increased at a 2.8 percent annual rate during the first quarter of 2010, the U.S. Bureau of Labor Statistics reported today, with output rising 4.0 percent and hours rising 1.1 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2009 to the first quarter of 2010, output increased 3.0 percent while hours fell 3.0 percent, yielding an increase in productivity of 6.1 percent (tables A, and 2). This gain in productivity from the same quarter a year ago was the largest since output per hour increased 6.1 percent over the four-quarter period ending in the first quarter of 2002.

My post the other day noted the concern by some that we were entering a period of deflation and how we need to reinflate to combat this. This is a position that some on the right find indefensible, noting that inflating our way out of trouble is not really a path to prosperity.

But what about monetary policy in a time of productivity growth? Isn't it acceptable for the money supply to increase to match this growth? If we were under a commodity money system and productivity rose without a corresponding increase in money, wouldn't we have more goods chasing less gold? Under these circumstances, I think, even the Mises people are OK with a monetary expansion.

I realize this is basically a bunch of questions, which makes for a lousy blog post, but I really am wondering what the implications are for monetary policy during a time of productivity growth.

Posted via email from rhymeswithclown's posterous


D said...

No, 'Mises people' (and by that I assume you mean economists as opposed to political operatives) are not OK with inflation at any time. Why would anyone be?

I have yet to see any rational argument for inflating for no reason at all.

"More good chasing less gold," in other words a stable money supply, (assuming, ceteris paribus, productivity is increasing) simply means your money goes farther. For what reason do we want to avoid a more valuable unit of money?

This seems to be the monetarist argument that we need 'stable' prices. 'Stable' prices is an attack on the entirety of supply and demand and inherently unstable. Why must prices remain stable? It is more beneficial to the consumer to be able to purchase more goods with the same amount of money. It is more beneficial to the producer to know how much more productive he is in order to structure his production accordingly.

What is the obsession with inflation? Inflating the money supply to match growth takes away key indicators for producers as to the real state of the economy. As we all know, ceteris paribus, increased productivity means that more can be produced for the same amount, or less. If prices are continually the same, how can resources be allocated?

As I've stated, Price coordinates production across time. Destroying price results in misallocations.

Jeremy R. Shown said...

Thanks D.

This was basically comment-bait for some ideas I'm trying to work out in my own head.

Dad29 said...


That 'productivity increase' was momentary.

What you saw is more shipped goods (inventory reductions) with same or less employees. It takes VERY little labor to push boxes onto trucks for shipment.

Once demand increases to (say) 2007 levels, employees will be added and "productivity" will diminish apace.