Technological regress

An old joke about Real Business Cycles is that they assume recessions are caused by technological regress. Without other frictions, the only way for an economy to get lower output given the installed capital and the number of workers is to have a sudden drop in productivity of those inputs.

Well, who in the hell ever heard of a technological regression? What, did people forget how make stuff? lose the blueprint? Ha ha ha… those stupid RBC theorist. What a bunch of mathematical masturbation!

Ahem. Well, here are three examples of technological regress. First, the financial mess can be seen as throwing sand in the works. Its harder to get working capital — if your bank is skittish you have to walk down the street to get your loans from somewhere else — so production is more expensive. Second, here’s Willem Buiter entertainingly complaining about centralization causing technological regress. Third, an increase in distortions in the finance sector where it is harder for some sectors to get financing can *look* like technological regress.

The last point was explained by Prof. Kehoe at the loooooooooooooong session on monetary policy at the AEA meetings (see day two part 1). He shows a simple single sector growth model with plain vanilla productivity shocks (i.e. technological regress) is observational equivalent to a more sophisticated two sector model with sector specific labor costs (e.g. costs in working capital). The more sophisticated model tells a story for why there is “technological regress” but it doesn’t necessarily tell us more about the economy. For that, the model would need to generate other testable predictions.

The RBC literature found “technological shocks” were important for explaining business cycles. Many, perhaps more conservative, economists took this result literally… variation in stuff policy makers have no control over, namely exogenous technology, cause business cycles so policy can’t help smooth cycles. For this literal interpretation of “technology shocks” those economists were rightly ridiculed, but the lesson of RBC models is exactly what it should be: these models identified a fundamental cause of business cycles and they pointed the way to a deeper understanding. To understand business cycles, we need to understand “technological shocks”. RBC models aren’t wrong; they’re just not right enough.

15 thoughts on “Technological regress”

  1. But where did the financial crisis come from? It seems to me that it was the result of the excesses of the boom. Now you could say that the fact that credit booms tend to be followed by busts can be modelled by a positive “technology shock” (people can borrow more -> buy bigger houses with same income -> more productive!), that has mean-reverting autocorrelation – but that loses everything interesting about it. First of all, it doesn’t tell us what’s happening right now (did a RBC theorist call the tech or housing bubble in real time?) and it cannot give a causal explanation of why today’s negative shock followed from yesterday’s positive shock (the central feature of credit, after all, is that it must be paid back in the future).

  2. Technologies are lost all the time. We just don’t feel their loss, much, because they are replaced by newer, better technologies. I think we’d be in very bad shape if the pace of technological advancement slowed or stopped, for reasons even beyond the obvious economic issues.

  3. I disagree that people stopped at “TFP is exogenous”. As early as the late ’80s Prescott was asking for “a theory of total factor productivity” and Barriers to Riches is mainly that.

    There are plenty of models that endogenize TFP… the hard part is to have it fluctuate enough at high frequencies.

  4. swong: you’re probably not an economist… because you’re using the word “technology” correctly! One of the most confusing things about academic economics is how words like “technology”, “productivity”, “savings” etc that have one meaning in ordinary English, are subtly redefined to mean something else – so when you see economists mention “technology”, we mean anything that increases “productivity” (i.e. increases the market value of the output, given same-valued inputs). A “negative” technology shock is anything that decreases productivity – so some have proposed e.g. wasteful red tape as a negative shock.

  5. “It seems to me that it was the result of the excesses of the boom.”

    You say sticking mean reversion in the technology shock doesn’t explain much and I agree. Its not clear how “excesses of the boom” does a better job of explanation. You’re just throwing in something exogenous and that thing explains everything.

    The solution is to build models that have endogenous propagation mechanisms and to test those models. What might those mechanisms be?

  6. ssendam, I should have said “technology wedge” using the business cycle accounting lingo. Gabriel, this rephrasing suggests better what I meant… “technology shocks” aren’t technology shocks and they’re not necessarily TFP. Growth theorists take this meaning, but as Kehoe et al show, there’s other non-technology related models that can produce time-varying “technology wedges”.

    Its almost like economists need their own language. From now on, let’s call “technology shocks” A_t where A_t is the thing in front of the production function, F(K_t,gamma_t L_t), in the production equation, Y_t = A_t F(K_t, gamma_t L_t) …

    OH GAWD!!! Math!!! Someone tell Prof. Clark on me!!!

  7. Gotta love Ed Prescott — He’s saying now that the RBC model shows that counter-cyclical policy is counterproductive. He includes, of course, Fed manipulation of interest rates and this “non-standard” monetary policy which is ostensibly going to save us…

    Anyway, Will, I’m just curious to hear more about how this non-standard monetary policy…

    Usually, when the market takes a hit like today, or when we here news like “japan contracted at a 13% annual rate”, the Fed would step in, cut rates by half a point, and Wall Street would stage a huge rally. (Which, by the wealth effect & confidence effects, boosts consumption and investment immediately.) Now, the fed can buy more stuff than just short term t-bills, and they can insure a bunch of other stuff, and loan out a bunch of money to troubled financial institutions, but do they really have any policy options that are nearly as potent as an unexpected rate cut in normal times?

    The other issue is that the CPI-W has gone from about 5%inflation from last january to august, and has deflated at about 5% since then. I know, I know, that mostly is the result of cheaper gasoline, which isn’t likely to get thaaat much cheaper, but still, consumption baskets are 5% cheaper today than last summer. The Fed funds rate was what, 3% and falling last summer? Vs. a 10% swing in inflation? Doesn’t that imply that the real rate has actually increased by some 7% in the past year? Why wouldn’t this be contractionary?

    And do you really think that California’s policy, of laying off 20,000 workers in a downturn, is sound policy?

    And as far as this being a “real” shock, did you see the data on car purchases in January? They were lower than new car purchases during pretty much all of the 80s & 90s… It’s not that we’re poorer than we were in the 80s, but its the herd behavior and human tendency to overreact…

  8. “do they really have any policy options that are nearly as potent as an unexpected rate cut in normal times?”

    Yes, I would rather we were in normal times. Alas, we’re not, but “not normal times” does not mean “magical fiscal omnipotence”.

    Consumption falls in recessions, as does employment. This isn’t news. Also, “this is a bigger than normal recession” doesn’t mean “magically, real shocks don’t matter”.

    BTW, Casey Mulligan has a working paper showing this recession (decreasing employment, decreasing consumption and increasing productivity) is consistent with a decline in labor supply (rather than a shift in productivity) and that decline is most likely due to an increase in the labor wedge. Why don’t people want to work? Mulligan claims several mortgage related policies create disincentives to work. It seems like a stretch at first, but read the paper and its pretty convincing.

    In the spirit of this post though, all he’s done is identify a wedge. There’s a lot (like an infinity) models that can explain that wedge. The job is find one that explains other facts, too.

  9. I see Casey Mulligan’s a Chicago guy, eh, i’m sure that will be a treat to read…

    he says the recession is caused by “labor market imperfections” — that’s baldly counterfactual.

    You know, I think we’re just not going to agree on the whole non-standard monetary policy thing. You wrote ‘ “not normal times” does not mean “magical fiscal omnipotence”.’
    The key is not that this is a really bad recession, the key is the zero lower bound. If there is something the Fed can do which has an equal impact of cutting the fed funds rate, they should be able to have an impact by simply announcing the policy change. I’m not sure why this simple implication of the zero lower bound is labeled “magical”, although, certainly, it’s not easy to grasp. I had thought the policy implications of liquidity traps were clear too — you just print/spend your way out.

    Do we really think Hoover did no wrong?

    After all, the Great Depression was a “real shock” in precisely the same sense. Was it really efficient for gangs of jobless youth to roam the country? It was simple wasteful gov’t spending of WWII that ended it, after all…

  10. Lol… I’m going to send that Casey Mulligan paper to my friend who has been looking for a job for the past three months… Ask her what her problem is anyway, labor demand hasn’t budged a smidgeon — should be easier to find a job at the moment, yah?

    a good way for other economists out there to make friends in the department is to stick that paper in the mailboxes of unsuccessful job market candidates!

  11. “And do you really think that California’s policy, of laying off 20,000 workers in a downturn, is sound policy? ”

    Our state government is about to have some very serious cash flow problems if the legislature can’t get a budget passed. State-issued IOUs aren’t without precedent, though… anyone up for printing out some Cali Republic Scrip?

    Reminds me of when I worked for a state university and had to barter for office supplies.

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