During a conversation with a colleague, the possible causes for the persistent decline in productivity growth were discussed, ranging broadly from the consequences of the credit crisis in 2008, to ageing populations in the mature industrialised nations and ever-increasing regulatory change. A further check whether other less obvious factors had been missed resulted in a google search and a surprise addition (to me anyway), technology.
It seems that technological progress has steadily diminished over the past few decades, particularly in the highly industrialised countries such as the US, Japan and the large Western European nations. The main reason is that the early impact (largely pre-2000) was driven by hardware advances, with broad-based benefits that had wide applications to many industries, providing easy high pay offs.
The post 2000 phase has largely been software related, which has required broader organisational changes and restructuring of business practices, which have largely been industry specific and taken much longer to implement. Also, short-term improvements due to general purpose technologies such as the internet have run into rising obstacles, such as internet security, with the benefits often failing to meet expectations and on numerous occasions have introduced new problems and constraints that need to be overcome.
Aside from technology, the broader issues continuing to undermine productivity growth are unlikely to change any time soon.
Economic growth in most countries has become more debt-driven, with both public and private debt increasingly created to stimulate growth, with the weight of debt likely to be a major constraint on productivity.
Growth-enhancing measures initiated by Government authorities often require painstaking regulatory reform, which can take time to complete and effectively implement. Too often bureaucratic inertia and a lack of innovation-friendly measures result in multiple bottlenecks undermining the potential for higher growth and, ultimately, productivity growth.
Free markets tend to produce unfair results where the powerful dominate the weaker market participants, which is a key feature of Trump’s current trade policy. This can often result in unintended broader consequences, with the rise in the populist movements questioning its merits. Even if globalisation has not worked to improve everyone’s living standards, it’s reversal into a period of protectionism will significantly damage growth and productivity.
Future economic growth will increasingly need to balance ecological and environmental constraints, which will further constrain growth, as China is now discovering, after a long period of largely unconstrained growth that did not pay much attention to environmental concerns.
In a world dominated by low interest rates, huge debt, global trade tensions and reactionary political movements, it is difficult to imagine how sustained improvements in productivity growth can occur, particularly when regulatory, ecological and environmental obligations are likely to be more restrictive, than less.
Is low Productivity the least of our problems?
One of our fundamental beliefs at TEAM is that modern economics has not kept pace with actual changes in the structure of the global economy and as a result the accepted interpretation of data can be mis-leading. Nowhere was this more evident when traditional economists erroneously speak of the “normalisation” of interest rates.
The historic definition of growth is intended to capture real movements in the amounts of goods and services which are produced, or real movements in material living standards. The total value of production in an economy can change either by the price of products changing, or by the physical amount of production changing. An economy can grow very quickly in terms of the total value of its output merely by having a rapid rate of inflation.
Therefore, a low level of inflation, and low interest rates, coupled with technological change in supply leading to price deflation (e.g. Amazon / production techniques) would logically depress the total value in output in monetary terms. Indeed, output could increase in real terms whilst decreasing in monetary terms.
There are also behaviour factors to consider, which may partly explain why some are obsessed with low growth and productivity figures. Human perception is often based on headline figures and Retail Supermarket plc increasing sales by 5% year on year is generally perceived to be better than a 1% year on year sales increase. Yet if inflation is running at 6% in the first example, and only 0.5% in the second, then the management are doing significantly better achieving the 1% sales growth than they are achieving 5%.
Economics is pre-occupied with monetary transactions. Work done within the household is not given any value in the current conventions of economics. Look after your neighbour’s child and you contribute to GDP, look after your own and you do not.
Much of modern “productivity” has been achieved outside of monetary transactions. Higher legal standards to not raise productivity. Environmental awareness and investment does not raise productivity. Investment in compliance and increased reporting does not raise productivity. Low interest rates and zero inflation does not raise productivity. Better workplace practices with more leisure time does not raise productivity. Greater personal phone distraction does not raise productivity.
In effect we have been sucked into a long-term low interest rate, low productivity, increasing indebtedness vortex. The danger is not from staying in the vortex, the danger is exiting it because the ramifications are extremely grave. If this were to happen then low productivity would be the least of our problems.