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Presentation at the NABE Foundation’s
20th Annual Economic Measurement Seminar
July 18, 2023
Aaron Betz
Macroeconomic Analysis Division
CBO’s Economic Forecast:
Understanding
Productivity Growth
For information about the seminar, see www.nabe.com/ems2023.
1
For more information about CBO”s forecast process, see Robert Arnold, How CBO Produces Its 10-Year Economic Forecast, Working Paper 2018-02 (Congressional Budget Office,
February 2018), www.cbo.gov/publication/53537.
The forecast is used primarily as an input to CBO’s 10-year federal budget
projections and analyses of legislative proposals.
It is a current-law forecast: It reflects the assumption that legislation will not
change but that policy changes built into current legislation will occur.
For example, under current law, certain tax provisions are scheduled to expire at
the end of 2025. CBO’s current forecast projects the economic responses to the
expiration of those provisions.
Purpose of CBO’s Economic Forecast
2
For information about how CBO projects potential output, see Robert Shackleton, Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model, Working Paper
2018-03 (Congressional Budget Office, February 2018), www.cbo.gov/publication/53558.
CBO’s approach involves projections of:
▪ Potential (maximum sustainable) output in a Solow-type growth model and
▪ Actual output in a standard macroeconometric model.
The estimate of potential output is mainly based on estimates of:
▪ The potential labor force,
▪ The flow of services from the capital stock, and
▪ Potential total factor productivity (TFP) in the nonfarm business sector.
CBO’s Approach to Forecasting
3
Real values are nominal values that have been adjusted to remove the effects of inflation. GDP = gross domestic product.
See Congressional Budget Office, The 2023 Long-Term Budget Outlook (June 2023), www.cbo.gov/publication/59014.
Average Annual Growth of Real Potential GDP
and Its Components
4
See Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033 (February 2023), www.cbo.gov/publication/58848.
Key Estimates in CBO’s Projection of Potential GDP, February 2023
Average Annual Percentage Growth,
by Calendar Year
Historical Periods Projection
1950–
2022
1950–
1973
1974–
1981
1982–
1990
1991–
2001
2002–
2007
2008–
2022
2023–
2032
Overall Economy
Real Potential Output 3.1 4.0 3.2 3.2 3.3 2.4 1.8 1.8
Potential Labor Force 1.4 1.6 2.5 1.6 1.2 1.0 0.5 0.4
Potential Labor Productivity 1.7 2.3 0.7 1.6 2.0 1.4 1.2 1.4
Nonfarm Business Sector
Real Potential Output 3.4 4.1 3.5 3.5 3.7 2.6 2.1 2.1
Potential hours worked 1.3 1.4 2.3 1.7 1.2 0.3 0.6 0.4
Capital services 3.4 3.8 3.7 3.5 3.9 2.8 2.4 2.2
Potential total factor productivity 1.4 1.9 0.8 1.1 1.5 1.5 0.9 1.1
Potential Labor Productivity 2.1 2.6 1.2 1.7 2.4 2.4 1.5 1.7
5
Vertical bars indicate the duration of recessions.
See Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033 (February 2023), www.cbo.gov/publication/58848.
Total Factor Productivity in the
Nonfarm Business Sector Since 2000
6
See Congressional Budget Office, The 2022 Long-term Budget Outlook (July 2022), www.cbo.gov/publication/57971.
Federal Debt Held by the Public If Total Factor Productivity Growth
Differed From the Growth Underlying CBO’s Extended Baseline
7
See John Fernald and Huiyu Li, The Impact of COVID on Productivity and Potential Output, Working Paper 2022-19 (Federal Reserve Bank of San Francisco, September 2022),
https://doi.org/10.24148/wp2022-19.
The longer-term effects of the coronavirus pandemic on TFP are unclear:
▪ Innovations associated with working from home could lead to substantial
reductions in costs and improvements in productivity in some sectors.
▪ Productivity improvements could lead to a decline in GDP (because of the
reduction in commuting and consumption associated with office work).
▪ Disruptions to the education system could have lasting effects that reduce the
productivity of workers in the future.
▪ Fernald and Li (2022) found that as of the middle of 2022, TFP was only
modestly affected, and they suggest that the long-term effects may be small.
Effects of the Pandemic on Total Factor Productivity
8
The slowdown began around 2005, before the financial crisis and the resulting
recession.
It is widespread among industries and international in scope.
Five areas of inquiry might shed light on the slowdown:
▪ Measurement issues,
▪ Feedback from slower growth of other economic factors,
▪ Demographic effects,
▪ Structural issues, and
▪ A slowdown in basic innovation.
Long-Term Slowdown of Growth of Total Factor Productivity and
Possible Reasons for It
9
Mismeasurement of inputs and outputs is persistent.
However, measurement issues account for only a small portion of the slowdown
of TFP growth:
▪ Mismeasurement does not appear to be worse than it was in the past.
▪ Products no longer reflected in measures of output have relatively modest
value to consumers compared with “missing” growth in TFP. An example is
photographs: Digital photographs, which are not accounted for in GDP, have
largely replaced printed ones, which were included in GDP.
▪ Measurement errors related to international supply chains are thought to
explain less than 0.1 percentage point of the slowdown of TFP growth per year.
Measurement Issues
10
Growth of the labor supply has slowed dramatically since the 1960s and 1970s.
Aggregate demand recovered slowly in the aftermath of the 2007–2009
recession.
Those two developments have led to relatively modest demand for capital
investment.
The net result is slower turnover of the capital stock and slower introduction of
new technologies (though there is little evidence of a backlog of technology).
Feedback From Slower Growth of Other Economic Factors
11
Highly skilled and well-educated baby boomers are retiring, lowering the
aggregate level of human capital, . . .
. . . but skilled and experienced workers tend to stay in the labor force longer,
pushing up the average skill level.
Educational attainment has grown more slowly than in previous generations
because it is already at a high level, . . .
. . . but educational attainment among younger cohorts has continued to improve,
especially during the 2007–2009 recession and its slow recovery.
Demographic Effects
12
The economy is becoming less dynamic:
▪ Top companies in many industries continue to have strong productivity growth, but
other companies increasingly lag behind.
▪ Rates of companies’ entry into and exit from the market have declined.
▪ The share of employment and output accounted for by young companies
(historically a source of productivity growth) has fallen.
Economists have yet to reach a consensus about the causes:
▪ Are barriers to entry getting higher?
▪ Are product markets becoming less contestable?
Restrictive land-use regulations increasingly raise housing costs and discourage
workers from migrating to denser urban areas, where most productivity growth occurs.
Structural Issues
13
Innovation from the late nineteenth century through the early 1970s involved the
discovery of several “general-purpose technologies” and was unique and
unsustainable.
The acceleration of TFP growth during the 1990s and 2000s was a temporary
deviation related to a new general-purpose technology: information technology.
We are “running out of ideas”: Research costs are rising, and new ideas are not
as economically significant.
Slowdown in Basic Innovation:
The Pessimistic View
14
See Erik Brynjolfsson, Daniel Rock, and Chad Syverson, “The Productivity J-Curve: How Intangibles Complement General Purpose Technologies,” American Economic Journal:
Macroeconomics, vol. 13, no. 1 (January 2021), pp. 333–372, https://doi.org/10.1257/mac.20180386.
The pool of potential innovators and the potential market for products are now
global.
Research tools are greatly improved.
Communication of innovations is much more rapid.
Major advances in technology can be expected—information technology is the
most recent example.
General-purpose technologies diffuse slowly, so it will take time for their full
economic impact to be realized. Brynjolfsson, Rock, and Syverson (2021)
suggest that the effects of general-purpose technologies such as artificial
intelligence can be underestimated in TFP early on.
Slowdown in Basic Innovation:
The Optimistic View
15
See Thomas Philippon, Additive Growth, Working Paper 29950 (National Bureau of Economic Research, April 2022), www.nber.org/papers/w29950.
Philippon (2022) argues that economists have mistakenly assumed that
innovations yield a constant growth rate for TFP.
Instead, the data suggest that innovations yield constant increments to TFP over
time.
That linear model of how innovation contributes to TFP implies a declining (but
positive) growth rate for TFP over time.
New general-purpose technologies can temporarily change the size of the
increments.
Slowdown in Basic Innovation:
A Conceptual Error? (A Middle View)

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CBO’s Economic Forecast: Understanding Productivity Growth

  • 1. Presentation at the NABE Foundation’s 20th Annual Economic Measurement Seminar July 18, 2023 Aaron Betz Macroeconomic Analysis Division CBO’s Economic Forecast: Understanding Productivity Growth For information about the seminar, see www.nabe.com/ems2023.
  • 2. 1 For more information about CBO”s forecast process, see Robert Arnold, How CBO Produces Its 10-Year Economic Forecast, Working Paper 2018-02 (Congressional Budget Office, February 2018), www.cbo.gov/publication/53537. The forecast is used primarily as an input to CBO’s 10-year federal budget projections and analyses of legislative proposals. It is a current-law forecast: It reflects the assumption that legislation will not change but that policy changes built into current legislation will occur. For example, under current law, certain tax provisions are scheduled to expire at the end of 2025. CBO’s current forecast projects the economic responses to the expiration of those provisions. Purpose of CBO’s Economic Forecast
  • 3. 2 For information about how CBO projects potential output, see Robert Shackleton, Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model, Working Paper 2018-03 (Congressional Budget Office, February 2018), www.cbo.gov/publication/53558. CBO’s approach involves projections of: ▪ Potential (maximum sustainable) output in a Solow-type growth model and ▪ Actual output in a standard macroeconometric model. The estimate of potential output is mainly based on estimates of: ▪ The potential labor force, ▪ The flow of services from the capital stock, and ▪ Potential total factor productivity (TFP) in the nonfarm business sector. CBO’s Approach to Forecasting
  • 4. 3 Real values are nominal values that have been adjusted to remove the effects of inflation. GDP = gross domestic product. See Congressional Budget Office, The 2023 Long-Term Budget Outlook (June 2023), www.cbo.gov/publication/59014. Average Annual Growth of Real Potential GDP and Its Components
  • 5. 4 See Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033 (February 2023), www.cbo.gov/publication/58848. Key Estimates in CBO’s Projection of Potential GDP, February 2023 Average Annual Percentage Growth, by Calendar Year Historical Periods Projection 1950– 2022 1950– 1973 1974– 1981 1982– 1990 1991– 2001 2002– 2007 2008– 2022 2023– 2032 Overall Economy Real Potential Output 3.1 4.0 3.2 3.2 3.3 2.4 1.8 1.8 Potential Labor Force 1.4 1.6 2.5 1.6 1.2 1.0 0.5 0.4 Potential Labor Productivity 1.7 2.3 0.7 1.6 2.0 1.4 1.2 1.4 Nonfarm Business Sector Real Potential Output 3.4 4.1 3.5 3.5 3.7 2.6 2.1 2.1 Potential hours worked 1.3 1.4 2.3 1.7 1.2 0.3 0.6 0.4 Capital services 3.4 3.8 3.7 3.5 3.9 2.8 2.4 2.2 Potential total factor productivity 1.4 1.9 0.8 1.1 1.5 1.5 0.9 1.1 Potential Labor Productivity 2.1 2.6 1.2 1.7 2.4 2.4 1.5 1.7
  • 6. 5 Vertical bars indicate the duration of recessions. See Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033 (February 2023), www.cbo.gov/publication/58848. Total Factor Productivity in the Nonfarm Business Sector Since 2000
  • 7. 6 See Congressional Budget Office, The 2022 Long-term Budget Outlook (July 2022), www.cbo.gov/publication/57971. Federal Debt Held by the Public If Total Factor Productivity Growth Differed From the Growth Underlying CBO’s Extended Baseline
  • 8. 7 See John Fernald and Huiyu Li, The Impact of COVID on Productivity and Potential Output, Working Paper 2022-19 (Federal Reserve Bank of San Francisco, September 2022), https://doi.org/10.24148/wp2022-19. The longer-term effects of the coronavirus pandemic on TFP are unclear: ▪ Innovations associated with working from home could lead to substantial reductions in costs and improvements in productivity in some sectors. ▪ Productivity improvements could lead to a decline in GDP (because of the reduction in commuting and consumption associated with office work). ▪ Disruptions to the education system could have lasting effects that reduce the productivity of workers in the future. ▪ Fernald and Li (2022) found that as of the middle of 2022, TFP was only modestly affected, and they suggest that the long-term effects may be small. Effects of the Pandemic on Total Factor Productivity
  • 9. 8 The slowdown began around 2005, before the financial crisis and the resulting recession. It is widespread among industries and international in scope. Five areas of inquiry might shed light on the slowdown: ▪ Measurement issues, ▪ Feedback from slower growth of other economic factors, ▪ Demographic effects, ▪ Structural issues, and ▪ A slowdown in basic innovation. Long-Term Slowdown of Growth of Total Factor Productivity and Possible Reasons for It
  • 10. 9 Mismeasurement of inputs and outputs is persistent. However, measurement issues account for only a small portion of the slowdown of TFP growth: ▪ Mismeasurement does not appear to be worse than it was in the past. ▪ Products no longer reflected in measures of output have relatively modest value to consumers compared with “missing” growth in TFP. An example is photographs: Digital photographs, which are not accounted for in GDP, have largely replaced printed ones, which were included in GDP. ▪ Measurement errors related to international supply chains are thought to explain less than 0.1 percentage point of the slowdown of TFP growth per year. Measurement Issues
  • 11. 10 Growth of the labor supply has slowed dramatically since the 1960s and 1970s. Aggregate demand recovered slowly in the aftermath of the 2007–2009 recession. Those two developments have led to relatively modest demand for capital investment. The net result is slower turnover of the capital stock and slower introduction of new technologies (though there is little evidence of a backlog of technology). Feedback From Slower Growth of Other Economic Factors
  • 12. 11 Highly skilled and well-educated baby boomers are retiring, lowering the aggregate level of human capital, . . . . . . but skilled and experienced workers tend to stay in the labor force longer, pushing up the average skill level. Educational attainment has grown more slowly than in previous generations because it is already at a high level, . . . . . . but educational attainment among younger cohorts has continued to improve, especially during the 2007–2009 recession and its slow recovery. Demographic Effects
  • 13. 12 The economy is becoming less dynamic: ▪ Top companies in many industries continue to have strong productivity growth, but other companies increasingly lag behind. ▪ Rates of companies’ entry into and exit from the market have declined. ▪ The share of employment and output accounted for by young companies (historically a source of productivity growth) has fallen. Economists have yet to reach a consensus about the causes: ▪ Are barriers to entry getting higher? ▪ Are product markets becoming less contestable? Restrictive land-use regulations increasingly raise housing costs and discourage workers from migrating to denser urban areas, where most productivity growth occurs. Structural Issues
  • 14. 13 Innovation from the late nineteenth century through the early 1970s involved the discovery of several “general-purpose technologies” and was unique and unsustainable. The acceleration of TFP growth during the 1990s and 2000s was a temporary deviation related to a new general-purpose technology: information technology. We are “running out of ideas”: Research costs are rising, and new ideas are not as economically significant. Slowdown in Basic Innovation: The Pessimistic View
  • 15. 14 See Erik Brynjolfsson, Daniel Rock, and Chad Syverson, “The Productivity J-Curve: How Intangibles Complement General Purpose Technologies,” American Economic Journal: Macroeconomics, vol. 13, no. 1 (January 2021), pp. 333–372, https://doi.org/10.1257/mac.20180386. The pool of potential innovators and the potential market for products are now global. Research tools are greatly improved. Communication of innovations is much more rapid. Major advances in technology can be expected—information technology is the most recent example. General-purpose technologies diffuse slowly, so it will take time for their full economic impact to be realized. Brynjolfsson, Rock, and Syverson (2021) suggest that the effects of general-purpose technologies such as artificial intelligence can be underestimated in TFP early on. Slowdown in Basic Innovation: The Optimistic View
  • 16. 15 See Thomas Philippon, Additive Growth, Working Paper 29950 (National Bureau of Economic Research, April 2022), www.nber.org/papers/w29950. Philippon (2022) argues that economists have mistakenly assumed that innovations yield a constant growth rate for TFP. Instead, the data suggest that innovations yield constant increments to TFP over time. That linear model of how innovation contributes to TFP implies a declining (but positive) growth rate for TFP over time. New general-purpose technologies can temporarily change the size of the increments. Slowdown in Basic Innovation: A Conceptual Error? (A Middle View)