SYNOPSIS: Krugman corrects a specious statement by Hubbard about productivity and the business cycle

Of all the things to be upset about right now, a silly fallacy in Glenn Hubbard's FT article today doesn't rate very high. But it's a fallacy I hear a lot, so let me take a minute to bash it.

Hubbard, like so many people, asserts that one reason for optimism about economic recovery is our continuing high rate of productivity growth. At first this sounds right: higher productivity growth means, other things equal, faster income growth, which means more spending, which means faster demand growth. So all that is good for recovery, right?

No, not really. What most people mean by recovery is job growth - an economy that is growing, but in which employment grows more slowly than the labor force, may be in recovery by some measures, but it will feel like it's still in recession.

Now what does productivity growth do? It raises incomes and hence demand. But it also raises the growth rate the economy needs to achieve to create jobs, and to a first approximation it does so by exactly the same amount. That is, an economy with 3 percent productivity growth will, other things equal, have 2 percent faster demand growth than an economy with 1 percent productivity growth; but it will also need a growth rate 2 percent higher to keep unemployment from rising.

In fact, the "productivity growth helps jobs" story, if that's what it is, is just the flip side of the lump-of-labor fallacy, which says that productivity growth reduces employment - and equally wrong. (There's a different argument, about how productivity growth reduces the NAIRU - but that's about the supply side, not the demand side).

You might say that I'm being too abstract; what about the lessons of history? But they all confirm this point. Terrific productivity performance in the 1920s didn't protect us against the Depression; all through the 70s and 80s Europe had higher productivity growth than the U.S., but worse job growth; you can multiply the examples.

I'm not surprised that Hubbard would make a silly argument; he is not, after all, a free man. But it's a sign of desperation, I think, that so many people have bought into this fallacy.

Originally published, 10.10.02