By James Pethokoukis

If America’s 1990s boom (which continued into the early 2000s after a mild downturn) had kept booming until today, we’d all be a lot richer. Consider the following:

• US labor productivity growth averaged nearly 3 percent annually from 1947 through 1973.
• This was followed by a downshift and stagnation to 1.5 percent per year from 1974 through 1994.
• Then came the tech (PC plus internet) boom from 1995 through 2004 when productivity growth accelerated to 2.8 percent.
• Finally, from 2005 through 2019, productivity growth averaged 1.3 percent.

By one estimate, the 2000s slowdown has cost the average American some $10,000. In the new analysis “Re-evaluating the sources of the recent productivity slowdown,” University of Oxford researchers (Ian Goldin, Pantelis Koutroumpis, François Lafond, and Julian Winkler, or GKLW) try to parse the causes for this second downshift. One thing I really like about this analysis is that it doesn’t just consider the American experience, as seen in this chart:

The Oxford researchers used three criteria to evaluate each explanation for the productivity slowdown: significance, scope, and sequencing. The explanation had to be “commensurate to the extent of the slowdown.” It needs to have affected multiple economies. And the timing has to work. GKLW: “This is why the global [financial] crisis is ruled out as the unique cause, as are slow secular movements such as aging.” So now let’s quickly run through a half dozen explanations:

• Mismeasurement. “We compile a number of biases that have been reported within existing research. These are essentially biases in deflators and issues with the GDP asset and production boundaries — intangible investment in particular. Taken together, these explain roughly 15% of the US slowdown. It is plausible that a similar estimate would apply for other leading economies.”
• Capital investment. “In the US, about 44% of the labor productivity slowdown is due to capital deepening. We find similar contributions for Germany and the UK, and much larger effects for Japan. In addition to this, it has been argued that investment in intangible assets, which lead to large spillovers, also affect total factor productivity. We find that the slowdown in intangible investment contributes almost 17% of the slowdown in the US, although we generally find much smaller effects in other countries.”
• Human capital. “Changes to human capital … have not been significant contributors to the productivity slowdown as the composition of the labor force changes slowly, at least in most countries. That said, when we consider education, skills, migration, ageing, and labor market institutions, we find that many recent or secular changes may also contribute to the total factor productivity slowdown. “
• Global trade. “International trade increased strongly after China’s entry to the WTO, triggering a reorganization of global value chains. But these productivity-enhancing trends clearly slowed down after the global crisis. Using published estimates of the impact of global value chain integration on labor productivity growth, we estimate that the slowdown in trade has contributed about 15% to the productivity slowdown in the US. For the rest of the countries (other than Germany), trade effects are less identifiable.”
• Dynamism. “The evidence is not clear-cut for all indicators, all countries, and all periods. But, overall, the trend appears to be that entry and exit rates have declined, and pure profits and concentration have gone up. … [Allocative] efficiency contributed around half of total factor productivity growth between 1997 and 2014 in the US. We compute that it also contributed to roughly half of its slowdown.”
• Technology. “For [Northwestern University economist Robert] Gordon, new technologies are not as impressive as technologies from the second industrial revolution, which affected all aspects of human life. For others, such as [Stanford University economist] Brynjolfsson, even if technologies were as transformative as those of the past, substantial complementary investments are necessary before we can reap similar efficiency gains. There are, however, no obvious ways to evaluate the intrinsic value of new technologies compared to those of the past, and we will have to wait for future data to know whether productivity gains will be realized with a lag.”

Bottom line: “While ongoing technological change creates a need for renewed regulatory frameworks, further research is required to allow for the design of specific industrial, competition, trade, and labor market policies to trigger a productivity renewal.”

So a multicausal explanation. That said, many of these causes reflect not a failing of market capitalism but rather harmful interventions or policies such as trade disruptions, immigration restriction, or an anti-investment tax code. And government needs to affirmatively do more in areas such as science investment and improving education and training. I think the problem here isn’t just that big gains have gotten harder. It’s also our response to that reality.

The post Thinking About the 2000s Productivity Slowdown appeared first on American Enterprise Institute – AEI.