Monday, December 12, 2011

Great Recession - A new theory linked to productivity improvement

I wrote a couple of years back on what has come to be known as the Great Recession of the twenty-first century. I remarked that the recession appears to show no signs of abating and recent events seems to have borne that out. While GDP growth in the US is in positive territory, it barely is. And the problems in Europe and a couple of natural disasters affecting Asia (the earthquake in Japan and the flooding in Thailand) have put brakes on the emerging markets engine that was pulling the world economy along for the last 4 years.

In the meantime, a number of well-argued articles and books have been written about the genesis of the crisis, and they have largely focused on the financial sector, the US mortgage market and the excesses there. The Nobel Prize winning economist, Joseph Stiglitz, approaches this issue from a slightly different angle in a recent write-up in Vanity Fair. Stiglitz argues that the Great Recession has its roots in something more benign than mortgages gone toxic. It lay in the productivity increases in the last two decades and caused a large number of job categories employing very large portions of the labor force to basically become redundant in the economy. What is interesting about this theory is that (Stiglitz argues) this is exactly what happened leading up to the Great Depression. The productivity improvements now are in the areas of manufacturing and services and the productivity improvement then was in agriculture.To quote, In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

Extremely interesting article and a forcefully made argument on the cause of the crisis and what could be done to solve it.

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