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May 23, 2010


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What I don't yet see is what the productivity gets used for. They could use fewer workers to produce the same goods - stable (or better) wages for the fewer people lucky enough to have jobs. That doesn't sound like much better net.

Or, higher exports! To...somebody, I guess.

(Of course, I may be misunderstanding you about the time frame here, and you may be talking about exporting to frex oil exporting countries in 2-3 years. How fast does the "internal devaluation" have to be?)

One of my problems with most of the economic blogosphere commentary is that they do a view-from-20,000 feet analysis of this or that problem but miss the (to me at least) view-from-50,000 feet reality that there is more supply in the world today than there is demand for it to fill. This was true before the recession started and it's true now when the recession is probably over.

How much infrastructure investment can the Spanish economy absorb?

Higher net exports is what Spain needs. Once you realize that that the "net" part is key, the problem seems much more manageable. Import substitution is as good as exportation.

That said, you're right; one of the problems is a lack of German demand. ("Somebody" means northern Europe in general, and Germany in particular.) It'd be nice for the Germans to realize that. If they don't want to spend more (and I can understand that) then it'd be nice for them to stop getting all wiggy about higher inflation.

A nice monetary goose would make everything much easier.

An obvious point is that a bubble is, by definition, a misallocation of resources. The Spanish economy hugely overestimated the value of producing more houses. As labour productivity is output by value/man-hour, you could consider this as a wrong estimate of productivity, leading them to produce beyond the efficient scale.

The good news is that once you stop hitting yourself over the head, the headache will eventually improve - switching resources back from residential construction to other sectors will be a productivity jump. However, this relies on sufficient aggregate demand to get other sectors' capacity utilisation high enough that they need to employ the ex-construction workers and ex-estate agents.

Also, there may be an econometric issue; if your productivity numbers for 2001-2007 are distorted by the Great Bubble, for a while, whatever else the workers do, it'll look like productivity has fallen sharply during the Great Pop. Does anyone adjust their productivity data according to prices retroactively?

It would be an interesting exercise to recast labour productivity numbers assuming the price-rent ratio or the price-salary multiple remained constant through the 2000s.

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