Thread by @Noahpinion

Today's @bopinion post is about a radical idea to possibly boost productivity: Let the macroeconomy run hot.
bloomberg.com/opinion/articl…

Typically, we think of productivity growth as a supply-side thing. Inventions emerge from labs, companies emerge from garages, policymakers change policies, etc. Meanwhile, the business cycle, caused by changes in aggregate demand, is disconnected from that.

Long-run supply-side stuff is hard to change. You can spend more on research. You can try to make your institutions a bit better, etc. But fundamentally it's an uphill battle, which is why lots of people throw up their hands and assume productivity is exogenous to policy.

But a few people have advanced the idea that if you pump up aggregate demand, it actually makes productivity grow faster.

bloomberg.com/opinion/articl…

That actually isn't a crazy idea. When sales are booming, it gives companies an incentive to invest in new technologies and skills. To buy the latest software, to train more workers, etc.

How important is this "embodied technological change"? It's actually pretty hard to tell. But there's a chance that it's pretty important.

frbsf.org/economic-resea…

On the off chance that raising aggregate demand really does have a significant effect on productivity, the Fed should try running the economy hot. It's worth a shot, anyway.

Yes, the notion that running the economy hot in an expansion will raise productivity is not mainstream. It might be wrong! But it might be right. And productivity slowdowns are a lot worse than anyone realize.

So I think it's worth taking the chance. Keep rates low!

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