An "older and slower" set of companies is holding back the economy.
The slowdown in U.S. productivity, a key to growth, jobs and rising wages, has provoked much debate among economists. But it’s real: From 2011 to 2015, labor productivity grew only 0.4 percent in annual output per hour (The federal government measures labor productivity by dividing an index of real output by an index of hours worked by all persons). We have to go back to the stagflation/recession years of 1977-1982 to find such a weak five-year period. Since the 1950s, productivity growth averaged 2.3 percent a year.
Is the culprit corporations buying back shares to raise the stock price instead of investing in making workers more productive? Is it the theory of economist Robert Gordon, that we lack the kind of previous transformational breakthroughs — such as electricity, large construction projects such as subways, and the discovery of antibiotics — to propel growth? He argues that tech today doesn’t promise the same benefits. Or is there a measurement error in the data that doesn’t properly account for productivity in the digital age?
Perhaps all three are at work. But new insights come thanks to a study by Titan Alon and David Berger of Northwestern University, Robert Dent of Nomura Securities and Benjamin Pugsley of the University of Notre Dame. They have submitted it to the National Bureau of Economic Research for peer review.
Their conclusions are that “a collapse in the rate of new startups alongside an enormous reallocation of economic activity from entrants and young firms to older incumbents” has played a significant role. As in, a cumulative drag on productivity of 3.1 percent since 1980. Since 2005, mature companies — those 20 years and older — have become “an even greater drag on productivity growth.” It’s a robustly modeled examination that builds on previous research, opening the door to further examination.
Alon et al don’t offer prescriptions to return dynamism to the startup scene. (I’d nominate, as just one measure, universal healthcare as a way to free up thousands of skilled entrepreneurs from the need to keep their day jobs.) And their thesis doesn’t conflict with the other suppositions about sluggish productivity. But it’s a valuable new contribution to something we need to figure out.
Today’s Econ Haiku:
Can’t we all just get along?
Sure, we’ll take your store