Max Sawicky has a look at Bob Hall's Jackson Hole paper, and remains unconvinced. Aside from the fact that Hall's take on things doesn't quite pass Max's smell test, the crux of the complaint seems to be summed up by this:
A smarter colleague writes:
"This stuff really is incredible -- he attributes cyclical fluctuations in output to changes in productivity -- rather than causal , this is almost definitional. If firms don't respond instantaneously to changes in demand by hiring more or less labor in exact proportion to the change in output, then higher output implies higher productivity and vice-versa. arghhhh."
It is true enough that identifying causality is one of the trickier aspects of data interpretation -- and one of the reasons there is so much scope for disagreement, even among people who are not really looking for a fight.
In his paper, Professor Hall does a simple decomposition and shows that over a seven-year horizon, the series identified as multifactor productivity by the Bureau of Labor Statistics accounts for about 60 percent of the variability in real GDP. In my own work, with Larry Christiano, Marty Eichenbaum, and Jesper Linde, we attempt to disentangle the contribution of permanent technology shocks -- both the multifactor type and the type that is specific to investment goods -- using statistical techniques that attempt to take the causality issue seriously. We find that, over roughly the same horizon, the productivity shocks account for roughly 30 percent of the variation in GDP. This is almost certainly an understatement, as this is just the effect of permanent productivity surprises. One of the themes of my many comments on this subject -- and one that I think is in the spirit of Hall's argument -- is that persistent, but not strictly permanent, real shocks are an important part of understanding the path of the economy over the typical business cycle.
Max may still argue these productivity variables still represent the "measure of our ignorance" -- and with some, not insubstantial, claim to legitimacy. But then the question remains: Are fluctuations in economic activity driven by things about which we are largely in the dark really the appropriate objects of aggressive monetary (or fiscal) policy?