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The downshift in US productivity growth started before the Great Recession. And it didn’t happen in just the US. Those are two factors any explanation needs to grapple with. Check out this table from “Total Factor Productivity in Advanced Countries: A Long-term Perspective” by French researchers Antonin Bergeaud, Gilbert Cette, and Rémy Lecat:
Note that I have highlighted the total factor productivity statistics for each of the advanced economies: US, UK, EA, and Japan. Obvious is a big decline in TFP — used as a measure of innovation, whether technological or better management — since the mid-2000s. Explaining that slowdown remains a live issue. From the paper (bold is mine):
The productivity slowdown appears to be a diffusion problem from the best performances at the frontier to the laggard firms. This diffusion problem seems to hinge on the nature of innovations at the current juncture, with intangible capital being more difficult to replicate, or on a winner-takes-all phenomenon in ICT sectors.
The puzzle is why such innovation diffusion difficulties appear to have become worse simultaneously in all developed countries, which are at different stages of development. Work in progress at the Banque de France on French firms confirms the OECD results but suggests complementary explanations. The cleansing mechanisms may indeed have become weaker. One explanation being tested is that this weaker cleansing mechanism could at least partly be explained by a decline in real interest rates and less expensive capital, which allow low-productivity firms to survive and highly productive firms to thrive.
Policies can influence TFP and GDP per capita growth. Relevant policies are ones that support innovation and foster greater productivity benefits from technological shocks. Examples are policies to reduce anti-competitive barriers on the product market, introduce more flexibility into the labour market, and increase the education level of the working age population . The challenge in the coming years for the four economic areas considered in this analysis will be not to miss the opportunities arising from a possible new TFP growth wave linked to a new technology shock.
This is good stuff. It reinforces other research suggesting there’s lots of innovation happening, it’s just not being broadly employed. So it’s maybe more a lack of dynamism issue — not enough competition or labor market churn — than a lack of invention issue.
Oh, and this: Creative destruction. Or as the phenomenon is described in the above block quote: ” … [a] weaker cleansing mechanism could at least partly be explained by a decline in real interest rates and less expensive capital, which allow low-productivity firms to survive and highly productive firms to thrive.” (Interesting also that some analysts want even looser monetary policy as a way of boosting productivity.)
Fascinating. Here is economist Timothy Taylor — whose invaluable Conversable Economist blog brought the French study to my attention — on that point:
In other words, when interest rates are so very low, the pressures to lend mostly to those firms with really good economic prospects is diminished, and lower-productivity firms feel less pressure to upgrade. I’m not confident that this answer applies very well for the US economy, but then, I’m not sure what other answers to offer, either.