Carney's productivity fixation

While his predecessor Sir Mervyn King was no fan of uttering "productivity", Mark Carney has delivered a speech peppered with the word.

This now appears to be a theme of Carney's public appearances, as he used the word repeatedly at this month's Inflation Report.

Ben Southwood, Adam Smith Institute:

It's interesting that Carney is putting his mind to productivity and aggregate supply—these are the things that determine the long-run living standards of society—but the reason Mervyn King didn't place too much emphasis on AS is that it isn't the Bank governors' job.

The Bank governors' job should be to stabilise the macroeconomy. Historically that has been through steady consumer price inflation, but the inflation target framework failed catastrophically and we are still paying for its flaws. The Carney Rule may be an improvement, but it is only marginal.

Carney should put a renewed focus on aggregate demand, ideally implementing a scheme to stabilise market expectations over nominal GDP, before considering AS issues, as vital as they are for the long run welfare of society.

He used the word no less than ten times during today's speech and seems to see it as a useful measure to determine the health of the economy.

Moreover, there is certainly scope for the economy to grow through an increase in output per hour worked rather than new job creation. Productivity growth has been anaemic and – remarkably – the UK is no more productive than it was back in 2005 – before Jake Bugg got his first guitar. The critical questions are how much and how quickly productivity improves.

The MPC’s central view is that productivity growth is likely to pick up only slowly in the early phase of recovery, but that there is potential for growth to accelerate as the recovery takes hold. The slow pickup in productivity means unemployment could initially fall quite rapidly, but fall short of 7%.

Over the next three years productivity is expected to grow at around 1.8% per year, below its pre-crisis trend of 2.2%. While even that modest productivity recovery is not assured, it is hardly an aggressive forecast. It implies that productivity reaches its 2008 level only in 2015. And it means that productivity doesn’t catch up any of its current 15% shortfall relative to its pre-crisis trend.

Were any productivity catch-up to happen, unemployment could take even longer than three years to reach the threshold. A rebound in productivity, if accompanied by higher output growth, would be no bad thing. It would boost the incomes of those in employment and is an essential part of improving the UK’s competitiveness.

Carney isn't alone in thinking that productivity is important. In his classic 1997 book, economics professor George Selgin that what central banks really need is a productivity norm.

Professor Scott Sumner responds to some of Selgin's ideas here.